Table ofContents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

** **

**x**** ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

**For thequarterly period ended March 31, 2010**

** **

**OR**

** **

**o****  ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

** **

**For thetransition period from      to      **

 

**COMMISSIONFILE NUMBER 000-29661**

 

**UTSTARCOM, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **DELAWARE**                              | ** ** | **52-1782500**                        |
|-------------------------------------------|------------|---------------------------------------|
| (State of  Incorporation)                 |       | (I.R.S. Employer  Identification No.) |
|                                      |       |                                  |
| **1275  HARBOR BAY PARKWAY**              | ** ** | ** **                            |
| **ALAMEDA,  CALIFORNIA**                  | ** ** | **94502**                             |
| (Address of  principal executive offices) |       | (zip code)                            |

 

Registrant’s telephone number, including areacode: **(510) 864-8800**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days. Yes x No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files). Yes o No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (check one):

 

| Large  accelerated filer o                |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                  |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No x

 

As of April 29, 2010there were 131,512,481 shares of the registrant’s common stock outstanding, parvalue $0.00125.

 

 

 

----

Table ofContents

 

**TABLEOF CONTENTS**

 
| PART I—FINANCIAL  INFORMATION                                                                 | 3  |
|---------------------------------------------------------------------------------------------------------|----|
| ITEM  1—CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                                    | 3  |
| ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 21 |
| ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK                                 | 34 |
| ITEM  4—CONTROLS AND PROCEDURES                                                                    | 36 |
| PART II—OTHER  INFORMATION                                                                    | 38 |
| ITEM  1—LEGAL PROCEEDINGS                                                                          | 38 |
| ITEM  1A—RISK FACTORS                                                                              | 38 |
| ITEM 2—UNREGISTERED SALES OF EQUITY SECURITIES AND USE  OF PROCEEDS                                | 38 |
| ITEM 3—DEFAULTS UPON SENIOR SECURITIES                                                             | 38 |
| ITEM  4—REMOVED AND RESERVED                                                                       | 38 |
| ITEM  5—OTHER INFORMATION                                                                          | 38 |
| ITEM  6—EXHIBITS                                                                                   | 39 |
| SIGNATURES                                                                                              | 41 |

 

2

----

Tableof Contents

 

**PART I—FINANCIAL INFORMATION**

 

**ITEM1—CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**UTSTARCOM, INC.CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

 
| ** **                                                                                                                                                                        | ** ** | **March 31,**                   | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **2010**                             | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                                                        | ** ** | **(In thousands, except par value)** | ** ** |
| **ASSETS**                                                                                                                                                                        |       |                                 |       |                  |       |
| Current assets:                                                                                                                                                                   |       |                                 | ** ** | ** **            | ** ** |
| Cash and cash  equivalents                                                                                                                                                        |       | $                                    | 234,441    |                  | $          | 265,843 |   |
| Short-term investments                                                                                                                                                            |       | 279                                  |       | 1,038                 |       |
| Accounts receivable,  net of allowances for doubtful accounts of $30,052 and $26,065, respectively                                                                                |       | 44,745                               |       | 42,346                |       |
| Notes receivable                                                                                                                                                                  |       | 473                                  |       | 1,427                 |       |
| Inventories                                                                                                                                                                       |       | 71,565                               |       | 72,300                |       |
| Deferred costs                                                                                                                                                                    |       | 127,909                              |       | 130,453               |       |
| Prepaids and other  current assets                                                                                                                                                |       | 53,004                               |       | 47,906                |       |
| Short-term restricted  cash                                                                                                                                                       |       | 20,941                               |       | 26,448                |       |
| Total current assets                                                                                                                                                              |       | 553,357                              |       | 587,761               |       |
| Property, plant and  equipment, net                                                                                                                                               |       | 129,168                              |       | 130,612               |       |
| Long-term investments                                                                                                                                                             |       | 9,001                                |       | 8,402                 |       |
| Long-term deferred  costs                                                                                                                                                         |       | 173,673                              |       | 184,978               |       |
| Long-term deferred tax  assets                                                                                                                                                    |       | 4,833                                |       | 4,822                 |       |
| Other long-term assets                                                                                                                                                            |       | 12,957                               |       | 12,536                |       |
| Total assets                                                                                                                                                                      |       | $                                    | 882,989    |                  | $          | 929,111 |   |
| **LIABILITIES AND EQUITY**                                                                                                                                                        |       |                                 | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                                                              |       |                                 |       |                  |       |
| Accounts payable                                                                                                                                                                  |       | $                                    | 42,333     |                  | $          | 54,115 |   |
| Income taxes payable                                                                                                                                                              |       | —                               |       | 1,130                 |       |
| Customer advances                                                                                                                                                                 |       | 131,734                              |       | 120,364               |       |
| Deferred revenue                                                                                                                                                                  |       | 170,487                              |       | 170,777               |       |
| Deferred tax  liabilities                                                                                                                                                         |       | 3,890                                |       | 3,890                 |       |
| Other current  liabilities                                                                                                                                                        |       | 133,873                              |       | 142,894               |       |
| Total current  liabilities                                                                                                                                                        |       | 482,317                              |       | 493,170               |       |
| Long-term deferred  revenue                                                                                                                                                       |       | 140,316                              |       | 160,932               |       |
| Other long-term  liabilities                                                                                                                                                      |       | 19,639                               |       | 18,858                |       |
| Total liabilities                                                                                                                                                                 |       | 642,272                              |       | 672,960               |       |
| Commitments and  contingencies (Note 10)                                                                                                                                     |       |                                 |       |                  |       |
| Equity:                                                                                                                                                                           |       |                                 |       |                  |       |
| UTStarcom, Inc.  stockholders’ equity:                                                                                                                                  |       |                                 |       |                  |       |
| Common stock: $0.00125  par value; 750,000 authorized shares; 131,510 and 130,095 shares issued and  outstanding at March 31, 2010  and December 31, 2009, respectively |       | 153                                  |       | 153                   |       |
| Additional paid-in  capital                                                                                                                                                       |       | 1,254,367                            |       | 1,251,532             |       |
| Accumulated deficit                                                                                                                                                               |       | (1,083,137                           | )          | (1,067,174            | )          |
| Accumulated other  comprehensive income                                                                                                                                           |       | 68,546                               |       | 70,848                |       |
| Total  UTStarcom, Inc. stockholders’ equity                                                                                                                             |       | 239,929                              |       | 255,359               |       |
| Noncontrolling  interests                                                                                                                                                         |       | 788                                  |       | 792                   |       |
| Total equity                                                                                                                                                                      |       | 240,717                              |       | 256,151               |       |
| Total liabilities and  equity                                                                                                                                                     |       | $                                    | 882,989    |                  | $          | 929,111 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

 

3

----

Table of Contents

 

**UTSTARCOM, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**

 
| ** **                                                                     | ** ** | **Three months ended March 31,**     | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                     | ** ** | **2010**                                  | ** ** | **2009** | ** ** |
| ** **                                                                     | ** ** | **(In thousands, except per share data)** | ** ** |
| Net sales                                                                      | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Products                                                                       |       | $                                         | 69,180     |   | $ | 105,512 |   |
| Services                                                                       |       | 11,667                                    |       | 13,828 |   |
|                                                                           |       | 80,847                                    |       | 119,340 |   |
| Cost of net sales                                                              |       |                                      |       |   |   |
| Products                                                                       |       | 46,282                                    |       | 87,036 |   |
| Services                                                                       |       | 7,356                                     |       | 10,652 |   |
| Gross profit                                                                   |       | 27,209                                    |       | 21,652 |   |
| *See  Note 16 for net sales to related party and associated cost of net sales* |       |                                      |       |   |   |
| Operating expenses:                                                            |       |                                      |       |   |   |
| Selling, general and  administrative                                           |       | 30,190                                    |       | 54,180 |   |
| Research and  development                                                      |       | 10,023                                    |       | 21,508 |   |
| Restructuring                                                                  |       | 7,507                                     |       | 4,819 |   |
| Net gain on divestiture                                                        |       | (1,752                                    | )          | — |   |
| Total net operating  expenses                                                  |       | 45,968                                    |       | 80,507 |   |
|                                                                           |       |                                      |       |   |   |
| Operating loss                                                                 |       | (18,759                                   | )          | (58,855 | ) |
|                                                                           |       |                                      |       |   |   |
| Interest income                                                                |       | 348                                       |       | 749 |   |
| Interest expense                                                               |       | (70                                       | )          | (290 | ) |
| Other income (expense),  net                                                   |       | 4,867                                     |       | (7,214 | ) |
|                                                                           |       |                                      |       |   |   |
| Loss before income  taxes                                                      |       | (13,614                                   | )          | (65,610 | ) |
| Income tax expense                                                             |       | (2,353                                    | )          | (1,824 | ) |
| Net loss                                                                       |       | (15,967                                   | )          | (67,434 | ) |
| Net loss attributable  to noncontrolling interests                             |       | 4                                         |       | 1 |   |
| Net loss attributable  to UTStarcom, Inc.                                 |       | $                                         | (15,963    | ) | $ | (67,433 | ) |
|                                                                           |       |                                      |       |   |   |
| Net loss per share  attributable to UTStarcom, Inc. - Basic and Diluted   |       | $                                         | (0.12      | ) | $ | (0.54 | ) |
|                                                                           |       |                                      |       |   |   |
| Weighted average shares  used in per-share calculation - Basic and Diluted     |       | 129,415                                   |       | 125,731 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

 

4

----

Table ofContents

 

**UTSTARCOM, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

 
| ** **                                                                   | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                   | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **                                                                   | ** ** | **(In thousands)**                    | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                     | (15,967    | ) | $ | (67,434 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                  |       |   |   |
| Gain on divestiture                                                          |       | (1,752                                | )          | — |   |
| Gain on settlement of  an investment interest                                |       | (422                                  | )          | — |   |
| Depreciation and  amortization                                               |       | 1,978                                 |       | 3,512 |   |
| Stock-based  compensation expense                                            |       | 2,860                                 |       | 4,146 |   |
| Provision for doubtful  accounts                                             |       | 4,046                                 |       | 8,347 |   |
| Other                                                                        |       | (30                                   | )          | (158 | ) |
| Changes in operating  assets and liabilities, net of dispositions:           |       |                                  |       |   |   |
| Accounts receivable                                                          |       | (8,461                                | )          | 54,938 |   |
| Inventories and  deferred costs                                              |       | 19,214                                |       | 8,167 |   |
| Other assets                                                                 |       | (598                                  | )          | 38,006 |   |
| Accounts payable                                                             |       | (16,860                               | )          | (66,151 | ) |
| Income taxes payable                                                         |       | (539                                  | )          | 3,441 |   |
| Customer advances                                                            |       | 8,979                                 |       | 18,525 |   |
| Deferred revenue                                                             |       | (19,878                               | )          | (6,191 | ) |
| Other liabilities                                                            |       | (16,685                               | )          | (11,155 | ) |
| Net cash used in  operating activities                                       |       | (44,115                               | )          | (12,007 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                       |       |                                  |       |   |   |
| Additions to property,  plant and equipment                                  |       | (470                                  | )          | (1,055 | ) |
| Proceeds from  divestiture                                                   |       | 1,500                                 |       | — |   |
| Deposit received on  pending sale of building                                |       | 6,583                                 |       | — |   |
| Change in restricted  cash                                                   |       | 4,995                                 |       | 2,068 |   |
| Proceeds from  settlement of an investment interest                          |       | 422                                   |       | — |   |
| Purchase of an  investment interest                                          |       | (563                                  | )          | — |   |
| Purchase of short-term  investments                                          |       | (5,102                                | )          | (2,055 | ) |
| Proceeds from sale of  short-term investments                                |       | 3,264                                 |       | 5,341 |   |
| Other                                                                        |       | 814                                   |       | 301 |   |
| Net cash provided by  investing activities                                   |       | 11,443                                |       | 4,600 |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                       |       |                                  |       |   |   |
| Repurchase of common  stock                                                  |       | (25                                   | )          | — |   |
| Other                                                                        |       | —                                |       | (163 | ) |
| Net cash used in  financing activities                                       |       | (25                                   | )          | (163 | ) |
| Effect of exchange rate  changes on cash and cash equivalents                |       | 1,295                                 |       | (2,463 | ) |
| Net decrease in cash  and cash equivalents                                   |       | (31,402                               | )          | (10,033 | ) |
| Cash and cash equivalents  at beginning of period                            |       | 265,843                               |       | 309,603 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                     | 234,441    |   | $ | 299,570 |   |

 

See accompanyingnotes to the condensed consolidated financial statements.

 

5

----

Table ofContents

 

**UTSTARCOM, INC.**

** **

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 1 -BASIS OF PRESENTATION**

 

The accompanyingunaudited condensed consolidated financial statements include the accounts ofUTStarcom, Inc. (“Company”) and its wholly and majority ownedsubsidiaries. All significant intercompany accounts and transactions have beeneliminated in the preparation of the condensed consolidated financial statements.The noncontrolling interests in consolidated subsidiaries are shown separatelyin the condensed consolidated financial statements.

 

The accompanyingunaudited condensed consolidated financial statements have been prepared by theCompany pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”). Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles in the United States (“GAAP”) have beencondensed or omitted pursuant to such rules and regulations. The December 31,2009 condensed consolidated balance sheet was derived from audited financialstatements, but does not include all disclosures required by accountingprinciples generally accepted in the United States. However, the Companybelieves that the disclosures are adequate to make the information presentednot misleading. These condensed consolidated financial statements should beread in conjunction with the Company’s December 31, 2009 financialstatements, including the notes thereto, and the other information set forth inthe Company’s Annual Report on Form 10-K for the year ended December 31,2009. The preparation of financial statements in conformity with GAAP requiresmanagement to make estimates and assumptions that affect the amounts of assets,liabilities, revenue, costs, expenses and gains and losses not affectingretained earnings that are reported in the consolidated financial statementsand accompanying disclosures. Actual results may be different. See the Company’s2009 Annual Report for discussion of the Company’s critical accounting policiesand estimates.

 

In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements reflect all adjustments (consisting of only normal recurringadjustments) considered necessary for a fair statement of the Company’sfinancial condition, the results of its operations and its cash flows for theperiods indicated. The results of operations for the three months ended March 31,2010 are not necessarily indicative of the operating results for the full year.

 

In December 2009,the Company entered into a Sales Leaseback Agreement for the sale of itsmanufacturing, research and development, and administrative offices facility inHangzhou, China to a third party for approximately $140 million withleaseback of a portion of the facility. To date, the Company has receivedproceeds of approximately $13.9 million on the transaction. On March 8,2010, the Company obtained an irrevocable bank guarantee letter from the buyerfor the remaining amount of the cash proceeds from the Sale LeasebackAgreement. In April 2010, an additional $55.9 million of sales proceedswere placed in escrow by the buyer. The agreement is expected to close in thesecond quarter of 2010.

 

On February 1, 2010,the Company entered into agreements for a strategic relationship with BeijingE-town International Investment and Development Co., Ltd (“BEIID”)which includes an investment of $48.5 million in the Company’s commonstock by BEIID, and two unrelated investment funds, Elite Noble Limited andShah Capital Opportunity Fund LP. These agreements are expected to closein the second quarter of 2010.

 

Management believes thatboth the Company’s China and non-China operations will have sufficientliquidity to finance working capital and capital expenditure needs during thenext 12 months. If the Company is not able to execute its plansuccessfully, the Company may need to obtain funds from equity or debtfinancings. There can be no assurance that additional financing, if required,will be available on terms satisfactory to the Company or at all, and if fundsare raised in the future through issuance of preferred stock or debt, these securitiescould have rights, privileges or preference senior to those of the Company’scommon stock and newly issued debt could contain debt covenants that imposerestrictions on the Company’s operations. Further, any sale of newly issueddebt or equity securities could result in additional dilution to the Company’scurrent shareholders.

 

6

----

Table ofContents

 

**NOTE****2 —ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS**

 

***Earnings PerShare***

 

Basic earnings per share (“EPS”) is computed bydividing net income (loss) available to common stockholders by the weightedaverage number of shares of the Company’s common stock outstanding during theperiod, which excludes nonvested restricted stock. Diluted EPS presents theamount of net income (loss) available to each share of common stock outstandingduring the period plus each share of common stock that would have beenoutstanding assuming the Company had issued shares of common stock for alldilutive potential common shares outstanding during the period. The Company’spotentially dilutive common shares include outstanding stock options, nonvestedrestricted stock, restricted stock units and Employee Stock Purchase Plan (“ESPP”)shares prior to termination of the ESPP effective May 15, 2009, which arereflected in diluted net income per share by application of the treasury stockmethod. Under the treasury stock method, the amount that the employee must payfor exercising stock options, the amount of stock-based compensation cost forfuture services that the Company has not yet recognized, and the amount of taxbenefit that would be recorded in additional paid-in capital upon exercise areassumed to be used to repurchase shares. For the three months ended March 31,2010 and 2009, no potential common shares were dilutive because of the net lossin the periods. Potential shares of common stock of approximately 9.2 millionand 15.1 million were excluded from the diluted per share calculation for thethree months ended March 31, 2010 and 2009, respectively, because toinclude them would have been anti-dilutive for the periods.

 

***Fair Value***

 

Pursuantto the accounting guidance for fair value measurements and its subsequentupdates, fair value is defined as the price that would be received from sellingan asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date. As such, fair value is amarket-based measurement that should be determined based on assumptions thatmarket participants would use in pricing an asset or liability. Theaccounting guidance also establishes a three-tier fair value hierarchy whichrequires the Company to use observable market data, when available, and tominimize the use of unobservable inputs when determining fair value. The fairvalue hierarchy prioritizes the inputs into three levels that may be used inmeasuring fair value as follows:

 

Level 1 - observableinputs such as quoted prices in active markets for identical assets orliabilities.

 

Level 2 - inputs otherthan the quoted prices in active markets for identical assets or liabilitiesthat are observable either directly or indirectly.

 

Level 3 - unobservableinputs based on the Company’s assumptions.

 

In January 2010, theFinancial Accounting Standards Board (“FASB”) issued amended standards thatrequire additional fair value disclosures. These disclosure requirements areeffective in two phases. In the first quarter of 2010, the Company adopted therequirements for disclosures about inputs and valuation techniques used tomeasure fair value as well as disclosures about significant transfers betweenhierarchy levels. Beginning in the first quarter of 2011, these amended standardswill require presentation of disaggregated activity within the reconciliationfor fair value measurements using significant unobservable inputs (Level 3).These amended standards do not significantly impact the Company’s consolidatedfinancial statements.

 

At March 31,2010, the Company had no assets and liabilities measured at fair value on arecurring basis. The Company’s money market funds are recorded at cost whichapproximates fair value, classified within Level 1 of the fair valuehierarchy. The fair value of certain of the Company’s financial instrumentsthat are not measured at fair value, including accounts receivable, accountspayable, and other current liabilities, approximates the carrying amountbecause of their short maturities.

 

During the quarter ended March 31,2010, the Company had no assets and liabilities measured at fair value on anon-recurring basis. At December 31, 2009, the Company determined as aresult of the sale leaseback transaction entered into in December 2009(see Note 7) that the net book value of its Hangzhou facility was in excess ofits fair value. Due to the apparent decline in value, the Company conducted arecoverability test for this entity-wide asset and determined the carryingvalue of the net assets of the Company exceeded the undiscounted cash flowsexpected to result from the use and eventual disposition of the asset group. Inthe Company’s assessment of fair value, management placed primary reliance onthe market approach (the third party offer). The result of this analysisreduced the Company’s overall assessment of fair value of the property by$33.3 million. Accordingly, the Company recorded a non-cash impairmentcharge of $33.3 million during the fourth quarter of 2009. The Company’soverall assessment of fair value of the property at December 31, 2009 wasbased on Level 2 inputs.

 

7

----

Table ofContents

 

***VariableInterest Entities***

 

In June 2009, theFASB issued authoritative guidance requiring an enterprise to perform ananalysis to determine whether the enterprise’s variable interest or interestsgive it a controlling financial interest in a variable interest entity. Thisanalysis identifies the primary beneficiary of a variable interest entity asone with the power to direct the activities of a variable interest entity thatmost significantly impact the entity’s economic performance and the obligationto absorb losses of the entity that could potentially be significant to thevariable interest. The Company adopted this new standard in the first quarterof fiscal year 2010. See Note 17 for the impact of the adoption of the guidanceon the Company’s consolidated financial statements.

 

***Recent Accounting Pronouncements Not Yet Adopted***

 

In September 2009,the FASB issued new standards for revenue recognition with multipledeliverables. These new standards impact the determination of when theindividual deliverables included in a multiple-element arrangement may betreated as separate units of accounting. Additionally, these new standardsmodify the manner in which the transaction consideration is allocated acrossthe separately identified deliverables by no longer permitting the residualmethod of allocating arrangement consideration. These new standards areeffective for the Company beginning in the first quarter of fiscal year 2011,however early adoption is permitted. The Company is currently assessing thepotential impact, if any, of the guidance on its consolidated financialstatements.

 

In September 2009,the FASB issued new standards for the accounting for certain revenuearrangements that include software elements. These new standards amend thescope of pre-existing software revenue guidance by removing from the guidancenon-software components of tangible products and certain software components oftangible products. These new standards are effective for the Company beginningin the first quarter of fiscal year 2011, however early adoption is permitted.The Company is currently assessing the potential impact, if any, of theguidance on its consolidated financial statements.

 

**NOTE3—DIVESTITURES**

 

*Sale ofRemote Access Server product line*

 

In January 2010, theCompany completed a sale of certain assets and liabilities related to itsRemote Access Server (“RAS”) product line and received total consideration ofapproximately $1.5 million. The primary RAS product was the Total Control1000 Transaction Gateway, which offers the market a proven processing platformfor carrier-class transaction network service providers and enterprises fordial-up connectivity. In the first quarter of 2010, the Company transferred netliabilities of approximately $0.3 million in connection with this transactionand recorded a net gain of $1.8 million as a reduction of operatingexpenses. The Company determined that the divestiture of the RAS product linedid not meet the criteria for presentation as a discontinued operation as theRAS product line did not meet the definition of component of an entity.

 

*Koreaoperations*

 

On July 31, 2009,the Company completed a sale of its Korea operations to an entity founded by aformer employee and received total consideration of approximately$2.0 million. In connection with this transaction, the Company recorded anet loss of $1.3 million during 2009. Included in this amount was$2.2 million of foreign currency losses previously carried in accumulatedother comprehensive income that were realized upon completion of sale andliquidation of the subsidiary. The Company determined that the divestiture ofKorea operations did not meet the criteria for presentation as a discontinuedoperation as the Korea operations did not meet the definition of component ofan entity.

 

*Sale ofAssets to Marvell Technology Group Ltd*

 

In February 2006,the Company sold substantially all of the assets and selected liabilities ofits semiconductor design business division to Marvell TechnologyGroup Ltd. (“Marvell”). In connection with the sale of assets, the Companyentered into a supply agreement with Marvell to purchase chipsets for theCompany’s handset products over the next five years. The value allocated to thesupply agreement of $20.2 million has been amortized in proportion to thequantities of chipsets purchased under the supply agreement. During the firstquarter of 2009, the Company revised its estimates of customer 

 

8

----

Table of Contents

 

demand for certainhandset products and determined that future chipset purchases from Marvellwould be negligible. As a result, the Company fully amortized against cost ofgoods sold the remaining value of the supply agreement of $8.5 million in thethree months ended March 31, 2009.

 

**NOTE 4 -COMPREHENSIVE LOSS**

 

Total comprehensive lossfor the three months ended March 31, 2010 and 2009 consisted of thefollowing:

 
| ** **                                                       | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                       | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **                                                       | ** ** | **(in thousands)**                    | ** ** |
| Net  loss                                                        |       | $                                     | (15,967    | ) | $ | (67,434 | ) |
| Unrealized  loss on investments, net of tax                      |       | —                                |       | (698 | ) |
| Foreign  currency translation                                    |       | (2,302                                | )          | 573 |   |
| Comprehensive  loss                                              |       | (18,269                               | )          | (67,559 | ) |
| Comprehensive  loss attributable to noncontrolling interests (1) |       | (4                                    | )          | (1 | ) |
| Comprehensive  loss attributable to UTStarcom, Inc.         |       | $                                     | (18,265    | ) | $ | (67,558 | ) |

 

----

(1)   Comprehensive loss attributable to noncontrollinginterests consisted solely of net loss.

 

The changes innoncontrolling interests during the three months ended March 31, 2010 and2009 were as follows:

 
| ** **                                                   | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                   | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**                    | ** ** |
| Balance  at beginning of period                              |       | $                                     | 792        |   | $ | 808 |   |
| Comprehensive  loss attributable to noncontrolling interests |       | (4                                    | )          | (1 | ) |
| Balance  at end of period                                    |       | $                                     | 788        |   | $ | 807 |   |

 

**NOTE****5 — BALANCE SHEETDETAILS**

 

As of March 31, 2010and December 31, 2009, total inventories consisted of the following:

 
| ** **          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------|------------|--------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **          | ** ** | **(in thousands)** | ** ** |
| **Inventories:**    | ** ** | ** **         | ** ** | ** **            | ** ** |
| Raw  materials      |       | $                  | 16,874     |                  | $          | 18,863 |   |
| Work  in process    |       | 15,712             |       | 12,881                |       |
| Finished  goods (1) |       | 38,979             |       | 40,556                |       |
| Total  inventories  |       | $                  | 71,565     |                  | $          | 72,300 |   |

 

----

(1)   Includes finished goods at customer sites ofapproximately $29.1 million and $33.8 million at March 31, 2010 and December 31,2009, respectively, for which the customer has taken possession, but based onspecific contractual terms, title has not yet passed to the customer.

 

Inventories ofapproximately $3.8 million held by the Company’s manufacturing outsourcepartner are recorded in prepaids and other current assets in the condensedconsolidated balance sheet at March 31, 2010.

 

9

----

Table of Contents

 

**NOTE 6 -CASH, CASH EQUIVALENTS, INVESTMENTS**

 

Cash and cashequivalents, consisting primarily of bank deposits and money market funds, arerecorded at cost which approximates fair value because of the short-term natureof these instruments. At March 31, 2010 and December 31, 2009, therewere no available-for-sale securities investments subject to fair valueaccounting included in cash and cash equivalents or long-term investments.

 

Short-term investments,consisting of bank notes, were $0.3 million and $1.0 million at March 31,2010 and December 31, 2009, respectively. The Company accepts bank notesreceivable with maturity dates of between three and six months from itscustomers in China in the normal course of business. The Company may discountthese bank notes with banking institutions in China. No bank notes were soldduring the three months ended March 31, 2010. During the three monthsended March 31, 2009, the Company sold $9.9 million of bank notes, andrecorded immaterial costs as a result of discounting the notes. All long-terminvestments are in privately-held companies and are accounted for under thecost method. The Company recognizes an impairment charge when a decline in thefair value of its investments below the cost basis is judged to beother-than-temporary. In making this determination, the Company reviews severalfactors to determine whether the losses are other-than-temporary, including butnot limited to: (i) the length of time the investment was in an unrealizedloss position, (ii) the extent to which fair value was less than cost, (iii) thefinancial condition and near term prospects of the issuer and (iv) theCompany’s intent and ability to hold the investment for a period of timesufficient to allow for any anticipated recovery in fair value.

 

The following table showsthe break-down of the Company’s investments in equity securities classified aslong-term investments at March 31, 2010 and December 31, 2009:

 
| ** **                    | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2010**                | ** ** | **2009**              | ** ** |
| ** **                    | ** ** | **(in thousands)** | ** ** |
|                          |       |                    |       |                  |       |
| Cortina                       |       | $                       | 3,348      |                  | $          | 3,348 |   |
| GCT  SemiConductor, Inc. |       | 3,000                   |       | 3,000                 |       |
| Xalted  Networks              |       | 1,583                   |       | 1,583                 |       |
| SBI                           |       | 1,070                   |       | 471                   |       |
| Total  equity securities      |       | $                       | 9,001      |                  | $          | 8,402 |   |

 

*SBI NEO Technology A InvestmentLPS (“SBI”)*

 

In 2008, the Companyinvested $0.5 million into SBI in exchange for approximately 2% of thePartnership interest. The Partnership’s investment objective is to invest inunlisted or listed companies in Japan and overseas that are engaged in highgrowth businesses, including businesses focused on information technology andthe environment. In the first quarter of 2010, the Company contributed anadditional $0.6 million into SBI, and at March 31, 2010 maintains anapproximately 2% Partnership interest. The Company has concluded that it doesnot have a controlling interest in SBI as it does not have the power to directthe activities of SBI that most significantly impact the entity’s economicperformance. Affiliates of a related party have a controlling interest in SBI,see Note 16. The Company accounts for the investment in SBI using the costmethod.

 

**NOTE 7 —LONG-LIVED ASSETS**

 

In December 2009,the Company entered into a Property Transfer and Leaseback Agreement (the “SaleLeaseback Agreement”) for the sale of its manufacturing, research anddevelopment and administrative office facility in Hangzhou, China to a thirdparty for approximately $140 million and the leaseback of a portion of theproperty through 2016. The transaction is expected to close in the secondquarter of 2010, subject to customary closing conditions, including completionof required regulatory approvals.

 

In connection with theSale Leaseback Agreement, on February 1, 2010, the Company entered into aLease Contract (the “Lease”) with respect to the leaseback of a portion of theHangzhou facility. Under the terms of the Lease, the Company will lease back71,027 sqm gross floor area (“GFA”) aboveground and 12,000 sqm GFA undergroundof the building for a period of 6 years at a rate of approximately $0.37,$0.44 and $0.47, respectively, per sqm per day for years 1-2, 3-4 and 5-6,respectively, of the lease period for the aboveground space; and approximately$3.66 per sqm per month for the underground space for the full lease period.The Company is also required to pay a security deposit in the amount ofapproximately 

 

10

----

Table of Contents

 

$1.8 million andprepay part of the rent and fees for the last six months of the lease term inthe amount of approximately $3.4 million on the same day when the firstrent payment is due. The Company may terminate all or part of the Lease bygiving six months advance notice, however, the Company would be required to paypenalties and additional compensation in the event of early termination.

 

At March 31, 2010and December 31, 2009, the long-lived asset to be sold was classified asheld for use as the Company expects to retain more than a minor portion of theuse of the property through a six-year leaseback. The Company expects thetransaction to qualify for sale-leaseback accounting upon closing. Any gainrealized on the sale leaseback will be deferred and amortized over theleaseback term.

 

To date, the Company hasreceived proceeds of approximately $13.9 million on the transaction. On March 8,2010, the Company obtained an irrevocable bank guarantee letter from the buyerfor the remaining amount of the cash proceeds from the Sale LeasebackAgreement. In April 2010, an additional $55.9 million of sales proceedswere placed in escrow by the buyer.

 

**NOTE 8 -WARRANTY OBLIGATIONS AND OTHER GUARANTEES**

 

The Company provides awarranty on its equipment and handset sales for a period generally ranging fromone to two years from the time of final acceptance. At times, the Company hasentered into arrangements to provide limited warranty services for periodslonger than two years. The Company provides for the expected cost of productwarranties at the time that revenue is recognized based on an assessment ofpast warranty experience and when specific circumstances dictate. The Companyassesses the adequacy of its recorded warranty liability every quarter andmakes adjustments to the liabilities if necessary. Specific warranty accrualsare reversed upon the expiration of the warranty period and are recorded as a reductionof cost of net sales. From time to time, the Company may be subject toadditional costs related to non-standard warranty claims from its customers. Ifand when this occurs, the Company estimates additional accruals based onhistorical experience, communication with its customers and various assumptionsthat the Company believes to be reasonable under the circumstances. Suchadditional warranty accruals are recorded in the period in which the additionalcosts are identified.

 

The following table summarizesthe activity related to warranty obligations during the three months ended March 31,2010 and 2009:

 
| ** **                                                                        | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                        | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                    | ** ** |
| Balance  at beginning of period                                                   |       | $                                     | 16,150     |   | $ | 29,840 |   |
| Accruals  (reversals) for warranties issued during the period, net of expirations |       | (1,760                                | )          | 3,582 |   |
| Settlements  made during the period                                               |       | (2,379                                | )          | (3,608 | ) |
| Balance  at end of period                                                         |       | $                                     | 12,011     |   | $ | 29,814 |   |

 

Certain of the Company’ssales contracts include provisions under which customers would be indemnifiedby the Company in the event of, among other things, a third-party claim againstthe customer for intellectual property rights infringement related to theCompany’s products. There are no limitations on the maximum potential future paymentsunder these guarantees. The Company has not accrued any amount in relation tothese provisions as no such claims have developed into assertable claims andthe Company believes it has defensible rights to the intellectual propertyembedded in its products.

 

**NOTE 9 -RESTRUCTURING COSTS**

 

***Restructuring Costs***

 

During the first quarterof 2010, the Company recorded approximately $7.5 million in restructuringcharges of which $7.1 million related to the 2009 Restructuring Plan and $0.4million related to the 2008 Restructuring Plan. During the first quarter of2009, the Company recorded approximately $4.8 million in restructuring chargesof which $4.6 million related to the 2008 Restructuring Plan and $0.2 millionrelated to the 2007 Restructuring Plan.

 

11

----

Table ofContents

 

*2009Restructuring Plan*

 

On June 9, 2009, theBoard of Directors of the Company approved a restructuring plan (the “2009Restructuring Plan”) designed to reduce the Company’s operating costs. The 2009Restructuring Plan includes a worldwide reduction in force of approximately 50%of the Company’s headcount, or approximately 2,300 employees located primarilyin China and the United States and, to a lesser degree, other internationallocations. During the three months ended March 31, 2010, the Companyrecorded restructuring costs of approximately $7.1 million related to the 2009Restructuring Plan, net of approximately $0.3 million of reversal of chargesrecorded in fiscal year 2009. The restructuring costs for the three monthsended March 31, 2010 consist primarily of severance and benefits relatedto additional employees included in the Restructuring Plan. Total restructuringcosts recorded through March 31, 2010 related to the 2009 Restructuring**Plan approximated $47.1 million.

 

*2008Restructuring Plan*

 

During fiscal 2008, theCompany implemented a restructuring plan (the “2008 Restructuring Plan”)primarily related to a global reduction in force across all functions andemployee terminations at certain non-core operations which the Company was inthe process of winding down. The total number of employees affected totaledapproximately 750, including 350 in China, 200 in Korea and 200 in otherlocations including the United States. During the three months ended March 31,2010, the Company recorded additional restructuring costs related to the 2008Restructuring Plan of approximately $0.4 million for severance and benefitcosts being recognized over the remaining service period for employees includedin the 2008 Restructuring Plan. During the three months ended March 31,2009, the Company recorded $4.6 million in restructuring charges related to the2008 Restructuring Plan including $3.4 million for severance and benefitsrelated to the transition of key functions to China and $1.1 million for leasetermination costs. Total restructuring costs recorded through March 31,2010 related to the 2008 Restructuring**Plan approximated $19.7 million.

 

*2007Restructuring Plan*

 

At March 31, 2010the restructuring accrual for the 2007 Plan included within other liabilitiesof approximately $0.1 million was related to a lease obligation whichexpires in fiscal year 2010.

 

The activity in theaccrued restructuring balances related to the plans described above was asfollows for the three months ended March 31, 2010:

 
| ** **                             | ** ** | **Balance at**             | ** ** | **Restructuring** | ** ** | **Cash**     | ** ** | **Non-cash**   | ** ** | **Balance at**          | ** ** |
|----------------------------------------|------------|----------------------------|------------|-------------------|------------|--------------|------------|----------------|------------|-------------------------|------------|
| ** **                             | ** ** | **December 31, 2009** | ** ** | **Charges**       | ** ** | **Payments** | ** ** | **Settlement** | ** ** | **March 31, 2010** | ** ** |
| ** **                             | ** ** | **(in thousands)**         | ** ** |
|                                   |       |                       |       |              |       |         |       |           |       |                    |       |
| 2009  Restructuring Plan               |       |                       | ** ** | ** **        | ** ** | ** **   | ** ** | ** **     |       |                    |       |
| Workforce  Reduction                   |       | $                          | 16,939     |              | $          | 7,042        |       | $              | (8,218     | )                       | $          | (1,194 | ) | $ | 14,569 |   |
| Lease  Costs                           |       | 1,516                      |       | 98                |       | (132         | )          | **—**     |       | 1,482                   |       |
| Other  Costs                           |       | 6                          |       | —            |       | —       |       | —         |       | 6                       |       |
| Total  2009 Restructuring Plan         |       | 18,461                     |       | 7,140             |       | (8,350       | )          | (1,194         | )          | 16,057                  |       |
|                                   |       |                       |       |              |       |         |       |           |       |                    |       |
| 2008  Restructuring Plan               |       |                       | ** ** | ** **        | ** ** | ** **   | ** ** | ** **     |       |                    |       |
| Workforce  Reduction                   |       | $                          | 2,526      |              | $          | 397          |       | $              | (1,033     | )                       | $          | — |   | $ | 1,890 |   |
| Lease  Costs                           |       | 385                        |       | —            |       | (236         | )          | **—**     |       | 149                     |       |
| Other  Costs                           |       | 30                         |       | (30               | )          | —       |       | —         |       | —                  |       |
| Total  2008 Restructuring Plan         |       | 2,941                      |       | 367               |       | (1,269       | )          | —         |       | 2,039                   |       |
|                                   |       |                       |       |              |       |         |       |           |       |                    |       |
| 2007  Restructuring Plan - Lease Costs |       | $                          | 305        |              | $          | —       |       | $              | (183       | )                       | $          | — |   | $ | 122 |   |
| Total                                  |       | $                          | 21,707     |              | $          | 7,507        |       | $              | (9,802     | )                       | $          | (1,194 | ) | $ | 18,218 |   |

 

12

----

Table ofContents

 

The majority of theremaining cash expenditures related to the 2009 and 2008 Restructuring Plansare expected to be paid in 2010. The remaining liabilities related to leaseobligations are expected to be settled over the remaining lease term. TheCompany expects to incur additional restructuring charges in 2010 as itcontinues to execute the 2009 and 2008 Restructuring Plans.

 

**NOTE 10- COMMITMENTS AND CONTINGENCIES**

 

***Litigation***

 

*SecuritiesClass Action Litigation*

 

Beginning in October 2004,several shareholder class action lawsuits alleging federal securitiesviolations were filed against the Company and various officers and directors ofthe Company. The actions have been consolidated in United States District Courtfor the Northern District of California under the caption *In re UTStarcom, Inc. Securities Litigation*,Master File No. C-04-4908-JW (PVT). The lead plaintiffs in the case fileda First Amended Consolidated Complaint on July 26, 2005. The First AmendedComplaint alleged violations of the Securities Exchange Act of 1934, and wasbrought on behalf of a putative class of shareholders who purchased theCompany’s stock after April 16, 2003 and before September 20, 2004.On April 13, 2006, the lead plaintiffs filed a Second Amended Complaintadding new allegations and extending the end of the class period to October 6,2005. In addition to the Company defendants, the plaintiffs are also suingSoftbank. Plaintiffs’ complaint seeks recovery of damages in an unspecifiedamount.

 

On June 2, 2006, theCompany and the individual defendants filed a motion to dismiss the SecondAmended Complaint. On March 21, 2007, the Court granted defendants’ motionand dismissed plaintiffs’ Second Amended Complaint. The Court grantedplaintiffs leave to file a Third Amended Complaint, which plaintiffs filedon May 25, 2007. On July 13, 2007, the Company and the individualdefendants filed a motion to dismiss and a motion to strike the Third AmendedComplaint. On March 14, 2008, the Court granted defendants’ motion anddismissed plaintiffs’ Third Amended Complaint. The Court granted plaintiffsleave to file a Fourth Amended Complaint, which plaintiffs filed on May 14,2008. On June 13, 2008, consistent with the Court’s March 14, 2008dismissal order, the Company and the individual defendants filed objections tothe form and content of the Fourth Amended Complaint. On July 24, 2008,the Court overruled the objections. On September 8, 2008, the Company andthe individual defendants filed a motion to dismiss and a motion to strikecertain allegations from the Fourth Amended Complaint. On March 27, 2009,the Court denied defendants’ motion to dismiss and granted defendants’ motionto strike. Discovery and motion practice are ongoing in this litigation. Notrial date has been set.

 

Plaintiffs, the Companyand the individual defendants have signed and filed a stipulation of settlementproviding for the settlement of the case. Defendant Softbank is not a party tothe settlement. The settlement is contingent on approval by the court. Underthe terms of the settlement, the Company’s and individual defendants’ insurerswould pay the full amount of the settlement. The Court has scheduled apreliminary approval hearing for May 10, 2010. There is no assurance thatthe settlement will receive court approval. Accordingly, the Company is unableat this time to estimate the effects of this lawsuit on the Company’s financialposition, results of operations, or cash flows.

 

*ShareholderDerivative Litigation*

 

On November 17,2006, a shareholder derivative complaint captioned *Ernesto Espinoza v. Ying Wu et al.*, Case No. RG06298775,was filed against certain of the Company’s current and former officers anddirectors in the Superior Court of the County of Alameda, California. Thecomplaint alleges that the individual defendants, among other things, breachedtheir duties, were unjustly enriched, and violated the California CorporationsCode in connection with the timing of stock option grants. The complaint namesthe Company as a nominal defendant and seeks unspecified monetary damagesagainst the individual defendants and various forms of injunctive relief. On February 2,2007, the Company and the individual defendants filed demurrers against thecomplaint. On April 11, 2007, the Court sustained the individualdefendants’ demurrer, overruled the Company’s demurrer, ordered the plaintiffto file an amended complaint, and ordered the Company to answer the originalcomplaint. The plaintiff filed an amended complaint and the Company has filedan answer to the amended complaint. On August 21, 2007, the individualdefendants filed demurrers against the amended complaint. The Court sustainedthe individual defendants’ demurrers and ordered the plaintiff to file asecond amended complaint. On September 26, 2008, plaintiff filed hissecond amended complaint. On November 21, 2008, the Company and theindividual defendants filed demurrers against the second amended complaint. On February 27,2009, the Court sustained the Company’s demurrer and ordered the plaintiff tofile a third amended complaint. On March 20, 2009, plaintiff filedhis third amended

 

13

----

Tableof Contents

 

complaint. On May 5,2009, the Company and the individual defendants filed demurrers against thethird amended complaint. On August 11, 2009, the Court sustained theCompany’s demurrer without leave to amend. On October 13, 2009, plaintiffsfiled a notice of appeal.

 

The parties have signed abinding Memorandum of Understanding providing for the settlement of the case.The settlement requires completion of final settlement documentation. Thesettlement is contingent on approval by the court. Under the terms of thesettlement, the individual defendants’ insurer would pay the full amount of themonetary portion of the settlement. On April 15, 2010, plaintiff filed a Requestfor Dismissal without prejudice with the Court of Appeals. Pursuant to theRequest, the appeal may be reinstated if the Superior Court does not grantpreliminary or final approval of the settlement. There is no assurance that thesettlement will receive court approval. Accordingly, the Company is unable atthis time to estimate the effects of this lawsuit on the Company’s financialposition, results of operations, or cash flows.

 

*IPO Allocation*

 

On October 31, 2001, a complaint was filed inUnited States District Court for the Southern District of New York against theCompany, some of the Company’s directors and officers and various underwritersfor the Company’s initial public offering. Substantially similar actions werefiled concerning the initial public offerings for more than 300 differentissuers, and the cases were coordinated as *In re Initial PublicOfferings Securities Litigation*, Civil Action No. 01-CV-9604.Plaintiffs allege violations of the Securities Act of 1933 and the SecuritiesExchange Act of 1934 through undisclosed improper underwriting practicesconcerning the allocation of IPO shares in exchange for excessive brokeragecommissions, agreements to purchase shares at higher prices in the aftermarketand misleading analyst reports. Plaintiffs seek unspecified damages on behalfof a purported class of purchasers of the Company’s common stock between March 2,2000 and December 6, 2000. The Company’s directors and officers have beendismissed without prejudice pursuant to a stipulation. On February 19,2003, the Court granted in part and denied in part a motion to dismiss theclaims brought by defendants, including the Company. The order dismissed allclaims against the Company except for a claim brought under Section 11 ofthe Securities Act of 1933, which alleges that the registration statement filedin accordance with the IPO was misleading.

 

In 2007, a settlement that had been pending with theCourt since 2004 was terminated by stipulation of the parties to thesettlement, after a ruling by the Second Circuit Court of Appeals in six testcases in the coordinated proceeding (the action involving the Company is notone of the test cases) made it unlikely that the settlement would receive finalCourt approval. Plaintiffs filed amended master allegations and amendedcomplaints in the six test cases, which the defendants in those cases moved todismiss. In 2008, the Court largely denied the defendants’ motion to dismissthe amended complaints.

 

The parties have reached a global settlement of thelitigation. Under the settlement the insurers will pay the full amount of thesettlement share allocated to the Company, and the Company will bear nofinancial liability. The Company, as well as the officer and directordefendants who were previously dismissed from the action pursuant to tollingagreements, will receive complete dismissals from the case. On October 5,2009, the Court entered an Opinion and Order granting final approval of thesettlement. Certain objectors have filed appeals. If for any reason thesettlement does not become effective, the Company believes it has meritoriousdefenses to the claims and intends to defend the action vigorously.

 

*OtherLitigation*

 

The Company is a party toother litigation matters and claims that are normal in the course ofoperations, and while the results of such litigation matters and claims cannotbe predicted with certainty, management of the Company believes that the finaloutcome of such matters will not have a material adverse impact on the Company’sfinancial position, results of operations or cash flows.

 

***Letters ofcredit***

 

The Company issuesstandby letters of credit primarily to support international sales activitiesoutside of China and in support of purchase commitments. When the Companysubmits a bid for a sale, often the potential customer will require that theCompany issue a bid bond or a standby letter of credit to demonstrate itscommitment through the bid process. In addition, the Company may be required toissue standby letters of credit as guarantees for advance customer paymentsupon contract signing or performance guarantees. The standby letters of creditusually expire without being drawn by the beneficiary thereof. Finally, theCompany may issue commercial letters of credit in support of purchasecommitments. At March 31, 2010, the Company had short-term restricted cashof $20.9 million, and had long-term restricted cash of $11.1 

 

14

----

Tableof Contents

 

million included in otherlong-term assets. The restricted cash amounts primarily collateralize theCompany’s outstanding letters of credit approximating $25.7 million at March 31,2010.

 

**NOTE 11— STOCK INCENTIVE PLANS**

 

During the quarter ended March 31,2010, the Company granted equity awards primarily consisting of restrictedstock and restricted stock units (“RSUs”), and to a much lesser extent, optionawards. Such awards generally vest over a period of one to four years from thedate of grant. Restricted stock has the voting rights of common stock and theshares underlying restricted stock are issued and outstanding.

 

In February 2008,the Compensation Committee granted 1,073,333 performance-based awards tocertain senior executive officers. During the third quarter of 2008, 233,333 ofthese contingently issuable shares were forfeited as a result of employeeterminations. On October 6, 2008, the performance requirements withrespect to 60,000 of these contingently issuable shares were eliminated, theserestricted stock units have a fair value of $2.69 per share, which equals theclosing price of the Company’s common stock on the NASDAQ Stock Market on themeasurement date of October 6, 2008. On February 18, 2009, theCommittee determined, based on the Company’s and each executive officer’s levelof performance during the Company’s 2008 fiscal year, that an additional367,500 shares underlying the previously granted performance-based restrictedstock units had been earned, each of these performance-based restricted stockunits has a fair value of $1.27 per share, which equals the closing price ofthe Company’s common stock on the NASDAQ Stock Market on the measurement dateof February 18, 2009. These restricted stock units vested 50% on February 27,2009 and 50% vested on February 26, 2010.

 

In February 2009,the Compensation Committee also granted to senior executive officers 313,293restricted stock units with a four-year vesting and an additional 626,586performance-based awards, subject to the attainment of goals determined by theCompensation Committee. The Company may be subject to variable levels ofexpense related primarily to the varying levels of performance, as well as forfluctuations in the Company’s stock price as these awards are “marked to market”periodically until the earlier of i) the date of the Compensation Committee’sdetermination on performance or ii) the date they were deemed fully vested as aresult of involuntary termination. Of the 626,586 performance-based awardsgranted in February 2009, 401,859 awards were deemed fully vested duringfiscal 2009 as a result of involuntary terminations, prior to the annualCompensation Committee’s evaluation of performance. At its meeting on February 18,2010, the Compensation Committee evaluated the performance against establishedobjectives of the remaining 224,727 performance-based awards and determined148,769 RSUs were earned.

 

In February 2010,the Compensation Committee decided no new stock-based awards would be grantedto senior executives for the 2010 year in light of the Company’s previouslyannounced planned changes in management.

 

To reduce the Company’slong term cost structure and manage shareholder dilution, the Company haselected to terminate the ESPP program effective May 15, 2009. Thecancellation has been accounted for as a settlement of shares for noconsideration. This resulted in an immediate expense recognition in the firstquarter of 2009 of $1.2 million associated with the unrecognized compensationfor canceled purchase periods of the 24-month offering.

 

The total stock-basedcompensation expense, including the ESPP expense described above, recognized inthe condensed consolidated statement of operations for the three months ended March 31,2010 and 2009 was as follows:

 
| ** **                           | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| ** **                           | ** ** | **(in thousands)**                     | ** ** |
| Cost of net sales                    |       | $                                      | 57         |   | $ | 430 |   |
| Selling, general and  administrative |       | 1,401                                  |       | 2,439 |   |
| Research and  development            |       | 208                                    |       | 897 |   |
| Restructuring                        |       | 1,194                                  |       | 380 |   |
| Total                                |       | $                                      | 2,860      |   | $ | 4,146 |   |

 

15

----

Tableof Contents

 

Option activity as of March 31,2010 and changes during the three months ended March 31, 2010 was asfollows:

 
| ** **                                     | ** ** | **Shares**              | ** ** | **Weighted   average exercise   price** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|
| ** **                                     | ** ** | **(in thousands)** | ** ** | ** **                              | ** ** |
| Options outstanding at  December 31, 2009 |       | 5,750                   |       | $                                       | 8.98       |   |
| Options Granted                                |       | 100                     |       | $                                       | 2.18       |   |
| Options  Exercised                             |       | —                  |       | $                                       | —     |   |
| Options  Forfeited or expired                  |       | (473                    | )          | $                                       | 10.36      |   |
| Options outstanding at  March 31, 2010    |       | 5,377                   |       | $                                       | 8.73       |   |

 

Nonvested restrictedstock and restricted stock units as of March 31, 2010, and changes duringthe three months ended March 31, 2010, were as follows:

 
| ** **                              | ** ** | **Shares**         | ** ** | **Weighted   average grant   date fair value** | ** ** |
|-----------------------------------------|------------|--------------------|------------|------------------------------------------------|------------|
| ** **                              | ** ** | **(in thousands)** | ** ** | ** **                                     | ** ** |
| Nonvested at  December 31, 2009    |       | 4,030              |       | $                                              | 2.38       |   |
| Granted                                 |       | 730                |       | $                                              | 2.43       |   |
| Vested                                  |       | (1,250             | )          | $                                              | 2.44       |   |
| Forfeited                               |       | (128               | )          | $                                              | 1.81       |   |
| Total nonvested  at March 31, 2010 |       | 3,382              |       | $                                              | 2.39       |   |

 

At March 31, 2010,there was approximately $7.4 million of total unrecognized compensation cost,related to non-vested stock options, restricted stock and restricted stockunits, as measured, which the Company expects to recognize over aweighted-average period of 1.9 years. For additional information regarding theCompany’s stock-based compensation plans, see the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2009.

 

**NOTE 12- INCOME TAXES**

 

As of December 31,2009, the Company had gross unrecognized tax benefits of approximately$90.6 million and had certain deferred tax assets and the federal taxbenefit of state income tax items totaling $77.8 million. If recognized,the portion of gross unrecognized tax benefits that would decrease theprovision for income taxes and decrease the Company’s net loss is approximately$12.8 million. The Company reduced its total unrecognized tax benefits byapproximately $26.5 million during the first quarter of 2009 due tostatute of limitations expirations and settlements of income tax audits. The portionof this $26.5 million reduction of gross unrecognized tax benefits thatdecreased the provision for income taxes and decreased the Company’s net lossduring the quarter was approximately $1.4 million.

 

As of March 31,2010, the Company had gross unrecognized tax benefits of approximately$91.5 million and had certain deferred tax assets and the federal taxbenefit of state income tax items totaling $78.1 million. If recognized, theportion of gross unrecognized tax benefits that would decrease the provisionfor income taxes and decrease the Company’s net loss is approximately$13.4 million.

 

The Company recognizesinterest expense and penalties related to the above unrecognized tax benefitswithin income tax expense. The Company had accrued interest and penalties ofapproximately $3.1 million as of December 31, 2009 and approximately $3.2million as of March 31, 2010.

 

The Company is subject totaxation in the U.S. federal jurisdiction and various U.S. state andforeign jurisdictions. The Company is under audit by the taxing authorities inChina on a recurring basis. The material jurisdictions that the Company issubject to examination are in the United States and China. The Company’stax years for 1999 through 2009 are still open for examination in China. TheCompany’s tax years for 2006 through 2009 are still open for examination in the

 

16

----

Table ofContents

 

United States. TheCompany believes that it is reasonably possible that the amount of grossunrecognized tax benefits related to the resolution of income tax matters couldbe reduced by approximately $1.0 million during the next 12 months as incometax audits are settled and statute of limitations expire. The portion of the$1.0 million of gross unrecognized tax benefits that would decrease theprovision for income taxes and increase the Company’s net income isapproximately $0.7 million.

 

FASB ASC 740-10establishes criteria for recognizing or continuing to recognize onlymore-likely-than-not tax positions, which may result in income tax expensevolatility in future periods. While the Company believes that it has adequatelyprovided for all tax positions, amounts asserted by taxing authorities could begreater than the Company’s accrued position. Accordingly, additional provisionson income tax related matters could be recorded in the future as revisedestimates are made or the underlying matters are settled or otherwise resolved.

 

In establishing itsdeferred income tax assets and liabilities, the Company makes judgments andinterpretations based on the enacted tax laws and published tax guidanceapplicable to its operations. The Company records deferred tax assets andliabilities and evaluates the need for valuation allowances to reduce thedeferred tax assets to realizable amounts. The likelihood of a material changein the Company’s expected realization of these assets is dependent on futuretaxable income and its ability to use foreign tax credit carryforwardsand carrybacks.

 

Income tax expense was$2.4 million for the three months ended March 31, 2010 compared to$1.8 million for the three months ended March 31, 2009. Income taxexpense for the three months ended March 31, 2009 included a one-time taxbenefit of $2.8 million related to the recognition of previously unrecognizedtax benefits and the reversal of interest and penalties due to statute oflimitations expirations and income tax audit settlements. The decrease inincome tax expense in the first quarter of 2010 compared with the first quarterof 2009, excluding the one-time tax benefit of $2.8 million, was primarily dueto the decreased ordinary income in jurisdictions where the Company has beenprofitable.

 

For 2010 and 2009, theCompany has not provided any tax benefit on any forecasted losses incurred andtax credits generated in the United States and other countries, becausemanagement believes that it is more likely than not that the tax benefitassociated with these losses will not be realized. Also, for 2010 and 2009, theCompany continues to accrue tax expense in jurisdictions where the Company hasbeen historically profitable. Estimates of the annual effective tax rate at theend of the interim periods are based on evaluations of possible future eventsand transactions and may be subject to subsequent refinement or revision.

 

**NOTE 13- OTHER INCOME (EXPENSE), NET**

 

Other income (expense),net for the three months ended March 31, 2010 and 2009, respectively werecomprised of the following:

 
| ** **                              | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **                              | ** ** | **(in thousands)**                    | ** ** |
| Foreign exchange gains  (losses)        |       | $                                     | 4,087      |   | $ | (7,258 | ) |
| Settlement with MRV  Communications (1) |       | 422                                   |       | — |   |
| Other                                   |       | 358                                   |       | 44 |   |
| Total                                   |       | $                                     | 4,867      |   | $ | (7,214 | ) |

 

----

(1)          Previously, the Company held an 8% ownership interestin Fiberxon, which was acquired by MRV Communications (“MRV”) in 2007. Inconnection with the acquisition, Fiberxon shareholders received cash and stockas well as the right to potential deferred consideration. During the currentperiod, MRV entered into a settlement agreement for dismissal of legalproceedings between MRV and the former shareholders of Fiberxon regarding theamount of contingent consideration owed related to its acquisition. Proceedsreceived represented the Company’s proportionate share of the settlementamounts.

 

**NOTE 14- SEGMENT REPORTING**

 

In the fourth quarter of2009, the Company substantially completed the wind-down of its handsetbusiness. Except for sales relating to inventory clearing, the Company does notexpect any significant handset revenue in 2010. Beginning on 

 

17

----

Table ofContents

 

January 1, 2010, theCompany integrated its Services Segment into its Multimedia Communications andBroadband Infrastructure segments based on products for which services areperformed. Effective January 1, 2010, the new reporting segments are asfollows:

 

·                  Multimedia Communications—Focused on development andmarket opportunities in IPTV solutions and Wireless infrastructuretechnologies, including related services revenue.

 

·                  Broadband Infrastructure—Focused on our world classportfolio of broadband products, including related services revenue.

 

·                  Handsets—Focused on mobile phone business includingPAS and CDMA handset market, as well as data cards markets. Handset sales toPCD LLC, which commenced after the July 1, 2008 sale of PCD, areincluded in this segment.

 

The Company’s chief operatingdecision makers make financial decisions based on information it receives fromits internal management system and currently evaluates the operatingperformance of and allocates resources to the reporting segments based onsegment revenue and gross profit. Cost of sales and direct expenses in relationto production are assigned to the reporting segments. The accounting policiesused in measuring segment assets and operating performance are the same asthose used at the consolidated level.

 

Summarized below are the Company’ssegment net sales, gross profit and segment margin for the three months ended March 31,2010 and 2009 based on the current reporting segment structure. The Company hasreclassified its previously reported segment information for the three monthsended March 31, 2009 to conform to the current segment presentation.

 
| ** **                 | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | ** **                            | ** ** | **% of net** | ** ** | ** ** | ** ** | **% of net** | ** ** |
| ** **                 | ** ** | **2010**                              | ** ** | **sales** | ** ** | **2009** | ** ** | **sales** | ** ** |
| ** **                 | ** ** | **(in thousands)**                    | ** ** |
| ***Net Sales by segment*** | ** ** | ** **                            |       |   |   |   |   |   |   |
| Multimedia  Communications |       | $                                     | 42,324     |   | 52 | % | $ | 42,484 |   | 36 | % |
| Broadband  Infrastructure  |       | 34,554                                |       | 43 | % | 20,795 |   | 17 | % |
| Handsets                   |       | 3,969                                 |       | 5 | % | 56,061 |   | 47 | % |
| Total                      |       | $                                     | 80,847     |   | 100 | % | $ | 119,340 |   | 100 | % |

 
| ** **                    | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | ** **                            | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                    | ** ** | **2010**                              | ** ** | **Profit%** | ** ** | **2009** | ** ** | **Profit%** | ** ** |
| ** **                    | ** ** | **(in thousands)**                    | ** ** |
| ***Gross profit by segment*** | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** |   |   |   |
| Multimedia  Communications    |       | $                                     | 16,020     |   | 38 | % | $ | 12,867 |   | 30 | % |
| Broadband  Infrastructure     |       | 9,623                                 |       | 28 | % | 2,483 |   | 12 | % |
| Handsets                      |       | 1,566                                 |       | 39 | % | 6,302 |   | 11 | % |
| Total                         |       | $                                     | 27,209     |   | 34 | % | $ | 21,652 |   | 18 | % |

 
| ** **                              | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **                              | ** ** | **(in thousands)**                    | ** ** |
| ***Segment Margin and Operating Loss*** |       |                                  |       |   |   |
| Multimedia  Communications              |       | $                                     | 8,201      |   | $ | 633 |   |
| Broadband  Infrastructure               |       | 6,544                                 |       | (2,365 | ) |
| Handsets                                |       | 1,191                                 |       | 236 |   |
| Total segment  margin                   |       | 15,936                                |       | (1,496 | ) |
| General and  Corporate                  |       | (34,695                               | )          | (57,359 | ) |
| Operating Loss                          |       | $                                     | (18,759    | ) | $ | (58,855 | ) |

 

18

----

Tableof Contents

 

Sales are attributed to ageographical area based upon the location of the customer. Sales data bygeographical area are as follows:

 
| ** **                | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| ** **                | ** ** | ** **                            | ** ** | **% of net** | ** ** | ** ** | ** ** | **% of net** | ** ** |
| ** **                | ** ** | **2010**                              | ** ** | **sales** | ** ** | **2009** | ** ** | **sales** | ** ** |
| ** **                | ** ** | **(in thousands)**                    | ** ** |
| ***Net Sales by region*** | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| China                     |       | $                                     | 39,975     |   | 49 | % | $ | 51,219 |   | 43 | % |
| United States             |       | 3,453                                 |       | 4 | % | 41,259 |   | 35 | % |
| Japan                     |       | 11,096                                |       | 14 | % | 6,537 |   | 5 | % |
| Philippines               |       | 12,684                                |       | 16 | % | 805 |   | 1 | % |
| Other                     |       | 13,639                                |       | 17 | % | 19,520 |   | 16 | % |
| Net sales                 |       | $                                     | 80,847     |   | 100 | % | $ | 119,340 |   | 100 | % |

 

Long-lived assets,consisting of property, plant and equipment, by geographical area are asfollows:

 
| ** **               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **               | ** ** | **(in thousands)** | ** ** |
| United States            |       | $                  | 110        |                  | $          | 170 |   |
| China                    |       | 128,391            |       | 129,746               |       |
| Other                    |       | 667                |       | 696                   |       |
| Total long-lived  assets |       | $                  | 129,168    |                  | $          | 130,612 |   |

 

**NOTE 15- CREDIT RISK AND CONCENTRATION**

 

At March 31, 2010,the Company’s accounts receivable balance included amounts due from PhilippineLong Distance Telephone Company and Softbank Telecom representing approximately14% and 11% of the total accounts receivable of the Company, respectively. At December 31,2009, the Company’s accounts receivable balance included amounts due from ChinaTelecom, JiangSu Branch representing approximately 11% of the total accountsreceivable of the Company.

 

The following customersaccounted for 10% or more of the Company’s net sales:

 
| **For the three months ended March 31,** | ** ** | **% of net sales** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|
| ** **                                    | ** ** | *** ***       | ** ** |
| **2010**                                      | ** ** | ** **         | ** ** |
| Philippine Long  Distance Telephone Company   |       | 16                 | %          |
| Softbank and affiliates                       |       | 13                 | %          |
|                                          |       | *** ***       |       |
| **2009**                                      | ** ** | ** **         | ** ** |
| PCD LLC                                       |       | 32                 | %          |

 

Approximately 15% and 22%of the Company’s net sales during the three months ended March 31, 2010and 2009, respectively, were to entities affiliated with the government ofChina. Accounts receivable balances from these China government affiliatedentities or state owned enterprises were $39.8 million and $45.7 million as of March 31,2010 and December 31, 2009, respectively. The Company extends credit toits customers in China generally without requiring collateral. With respect toglobal sales outside of China, the Company may require letters of credit fromits customers. The Company monitors its exposure for credit losses andmaintains allowances for doubtful accounts.

 

19

----

Tableof Contents

 

Approximately 49% and 43%of the Company’s sales for the three months ended March 31, 2010 and 2009,respectively, were made in China. Accordingly, the political, economic andlegal environment, as well as the general state of China’s economy mayinfluence the Company’s business, financial condition and results ofoperations. The Company’s operations in China are subject to specialconsiderations and significant risks not typically associated with companies inthe United States. These include risks associated with, among others, thepolitical, economic and legal environments and foreign currency exchange. TheCompany’s results may be adversely affected by, among other things, changes inthe political, economic and social conditions in China, and by changes ingovernmental policies with respect to laws and regulations, changes in China’stelecommunications industry and regulatory rules and policies,anti-inflationary measures, currency conversion and remittance abroad, andrates and methods of taxation.

 

**NOTE 16- RELATED PARTY TRANSACTIONS**

 

*Softbankand affiliates*

 

The Company recognizesrevenue with respect to sales of telecommunications equipment to affiliates ofSoftbank, a significant stockholder of the Company. Softbank offers ADSLcoverage throughout Japan, which is marketed under the name “YAHOO! BB.” TheCompany supports Softbank’s fiber-to-the-home service through sales of itscarrier class GEPON product as well as its NetRingÔproduct. In addition, the Company supports Softbank’s new internet protocoltelevision (“IPTV”), through sales of its RollingStreamÔproduct. During the three months ended March 31, 2010 and 2009, theCompany recognized revenue and related cost of net sales for sales oftelecommunications equipment and services to affiliates of Softbank as follows:

 
| ** **         | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------|------------|----------------------------------------|------------|
| ** **         | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| ** **         | ** ** | **(in thousands)**                     | ** ** |
|               |       |                                   |       |   |   |
| Net sales          |       | $                                      | 10,674     |   | $ | 6,165 |   |
| Cost of net  sales |       | 5,094                                  |       | 3,917 |   |
| Gross profit       |       | $                                      | 5,580      |   | $ | 2,248 |   |

 

Gross profit as apercentage of net sales fluctuations are expected and primarily result fromchanges in product mix. Included in accounts receivable at March 31, 2010and December 31, 2009 were $10.7 million and $5.5 million,respectively, related to these transactions.

 

Sales to Softbank includea three year service period and a penalty clause if product failure ratesexceed a certain level over a seven year period. As of March 31, 2010 and December 31,2009, the Company’s customer advance balance related to Softbank agreements was$0.2 million and $0.2 million, respectively. The current deferred revenuebalance related to Softbank was $1.1 million and $1.4 million as of March 31,2010 and December 31, 2009, respectively. As of March 31, 2010, theCompany’s noncurrent deferred revenue balance related to Softbank was $9.1million compared to $8.8 million as of December 31, 2009.

 

As discussed in Note 6,the Company has a $1.1 million investment in SBI. Affiliates of Softbank have acontrolling interest in SBI.

 

As of March 31,2010, Softbank beneficially owned approximately 11% of the Company’soutstanding stock.

 

**NOTE17—VARIABLE INTEREST ENTITIES**

 

In October 2008, theCompany made an investment in Turnstone Environment Technologies LLC (“TET”),a Delaware limited liability company formed for the purpose of licensing anddeveloping energy efficient renewable cooling solutions for cell towers in thetelecommunications industry. In exchange for 5,180,788 Series APreferred units representing approximately 22% of voting interest in TET and500,000 Series A Preferred warrants at an exercise price of $0.9265per unit and with an expiration term of 5 years, the Company contributed$4.8 million in cash. The Company currently does not have anyrepresentation on TET’s board of directors nor the ability to control themanagement and operation decisions of TET. The operations of TET are in thedevelopment stage and the entity is actively seeking additional investors. TheCompany does not intend to and has no obligation to fund future losses or makeadditional contributions other than its initial 

 

20

----

Table ofContents

 

investment. As of December 31,2009 and 2008, TET was in effect entirely funded by the Company’s initialinvestment as the capital contributions of the other current investors were notsubstantive. The Company determined that the venture was a variable interestentity and the Company was the primary beneficiary because it was exposed tothe majority of the variable interest entity’s expected losses. Therefore, theCompany was required to consolidate TET’s financial statements under ASC810-10-15, Variable Interest Entities**Subsections.Beginning January 1, 2009, the assets, liabilities and operating resultsof TET were consolidated into the Company’s balance sheet and statement ofoperations. TET had no revenues and $3.9 million in expenses for the year endedDecember 31, 2009, of which $3.1 million relates to amortization of anacquired exclusive license to utilize solar cooling technology. The Companyinitially determined the appropriate amortization period for the exclusivelicense was to match the estimated revenue generation period from sale ofproducts utilizing the licensed technology. In the third quarter of 2009, as aresult of the delay in revenue generation, the Company changed its estimate toa systematic and rational allocation of straight-line amortization expensebased on the term of the technology license. TET’s operations are not consideredto be integral to the Company’s major operating activities. As such, all incomeand expenses from TET’s operations, which are includable in the Company’sincome statement as a result of the application of ASC 810-10-15, VariableInterest Entities**Subsections, have beenclassified within operating expense.

 

In the fourth quarter of2009, the Company evaluated several fourth quarter events, including thecontinued unsuccessful efforts of TET to secure additional funding; thecontinued unsuccessful efforts of TET to locate a suitable local manufacturingpartner, TET’s continued need to amend and extend payment due dates of theacquired exclusive license to utilize solar cooling technology and thedeparture of a key employee of TET. The Company determined that the combinedeffect of these events, as well as others, was a triggering event for animpairment analysis of TET’s long-lived assets. The Company furthereddetermined that the estimated cash flows from TET were not sufficient torecover the carrying value of TET’s net assets. As a result, the Companyrecorded a $0.9 million impairment charge, included within operating expense,equal to its initial cost of investment of $4.8 million less the cumulativeabsorbed losses to date. As of December 31, 2009, the effect ofconsolidating TET resulted in an immaterial impact on the consolidated balancesheet.

 

In June 2009, theFASB issued authoritative guidance which revised the approach to identifyingprimary beneficiaries from a quantitative-based risks-and rewards calculationto a qualitative approach when assessing whether an entity has a controllingfinancial interest in a variable interest entity. This analysis identifies theprimary beneficiary of a variable interest entity as one with the power todirect the activities of a variable interest entity that most significantlyimpact the entity’s economic performance and the obligation to absorb losses ofthe entity that could potentially be significant to the variable interest. TheCompany adopted this new guidance in the first quarter of fiscal year 2010.Under the new guidance, the Company concluded that it does not have the powerto direct the activities of TET that most significantly impact the entity’seconomic performance, and therefore, is not TET’s primary beneficiary whichwould require consolidation. The Company further concluded that under the newguidance it would have accounted for its initial investment under the costmethod . The new guidance also requires an enterprise upon initial adoption todetermine the carrying amount of an investment in an entity that is no longerconsolidated, as if it always had applied the provisions of the new guidance.Because under either the consolidation model or the cost method, the balance(s) ofthe assets/liabilities (investment) would be zero in the financial statementsof the Company at December 31, 2009 or January 1, 2010, respectively,the adoption of the new guidance in the first quarter of 2010 has no financialstatement impact to the Company.

 

**ITEM2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

**FORWARD-LOOKINGSTATEMENTS**

 

This Quarterly Report on Form 10-Qcontains forward-looking statements regarding future events and our futureresults that are subject to the safe harbors created under the Securities Actof 1933 and the Securities Exchange Act of 1934. Forward-looking statements arebased on current expectations, estimates, forecasts and projections about us,our future performance and the industries in which we operate as well as on ourmanagement’s assumptions and beliefs. Statements that contain words like “expects,”“anticipates,” “may,” “will,” “targets,” “projects,” “intends,” “plans,” “believes,”“seeks,” “estimates,” or variations of such words and similar expressions areforward-looking statements. In addition, any statements that refer to trends inour businesses, future financial results, and our liquidity and business plansare forward-looking statements. Readers are cautioned that theseforward-looking statements are only predictions and are subject to risks anduncertainties, including those discussed in “Part II, Item 1A-Risk Factors”of this Form 10-Q. Therefore, actual results may differ materially andadversely from those expressed in any forward-looking statements. We do notguarantee future results, and actual results, developments and businessdecisions may differ from those contemplated by those forward-lookingstatements. We undertake no obligation to update these forward-lookingstatements to reflect events or circumstances occurring after the date of this Form 10-Q.

 

21

----

Table ofContents

 

**EXECUTIVESUMMARY**

 

We are one of the leadingglobal providers of Internet Protocol (“IP”)-based network solutions includingthe integration and support services sold to telecommunications operators inboth emerging and established markets around the world. Our focus is to designand sell IP-based telecommunications infrastructure products including ourprimary product suite of Internet Protocol TV (“IPTV”), and broadband solutionsalong with the ongoing services relating to the installation, operation andmaintenance of these products. Collectively our range of solutions is designedto expand and modernize telecommunications networks through smooth networksystem integration, lower operating costs and increased broadband access. Wealso provide the carriers with increased revenue opportunities by enhancingtheir subscribers’ user experience. The majority of our business is based inChina and India. We also sell to service providers in selective markets inAsia, Latin America and Europe.

 

We differentiateourselves with products designed to reduce network complexity, integrate highperformance capabilities and allow a simple transition to next generationnetworks. We design our products to facilitate cost-effective and efficientdeployment, maintenance and upgrades.

 

Because our products areIP-based, our customers can more easily integrate our products with otherindustry standard hardware and software. Additionally, we believe we canintroduce new features and enhancements that can be cost-effectively added toour customers’ existing networks. IP-based devices can be changed or upgradedin modules, saving our customers the expense of replacing their entire systeminstallation.

 

**Overview of Our First Quarter2010**

 

·                  Net sales decreased $38.5 million to$80.8 million during the first quarter of 2010 compared to the same periodin 2009. The decrease was primarily due to the wind-down of our handsetbusiness which resulted in a decrease of $52.1 million in revenue, partiallyoffset by a $13.8 million increase in sales of the Broadband Infrastructure segment.

 

·                  Gross profit was $27.2 million, or 34% ofnet sales, in the first quarter of 2010, compared to $21.7 million, or 18%of net sales, in the corresponding period of 2009. The overall gross profitincrease both in absolute dollars and percentage of net sales were primarilydue to the acceleration of PAS deferred revenue amortization of Multimedia Communications segment andincreased sales of higher margin TN products in the Broadband Infrastructuresegment.

 

·                  Selling, general and administrative andresearch and development operating expenses decreased $35.5 million primarilyas a result of restructuring and other cost reduction initiatives.

 

·                  During the first quarter of 2010, werecorded restructuring costs of approximately $7.5 million as we continuedto execute our 2009 Restructuring Plan and prior year restructuring plans. Weexpect to incur additional restructuring charges in 2010 as we continue toexecute the 2009 and 2008 Restructuring Plans.

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

Management’s Discussionand Analysis of Financial Condition and Results of Operations is based upon ourConsolidated Condensed Financial Statements, which we have prepared inaccordance with U.S. generally accepted accounting principles. The preparationof these financial statements requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenueand expenses, and related disclosure of contingent assets and liabilities.Estimates are based on historical experience, knowledge of economic and marketfactors and various other assumptions that management believes to be reasonableunder the circumstances. Actual results may differ from those estimates.

 

22

----

Table of Contents

 

On aregular basis we evaluate our estimates, assumptions and judgments and makechanges accordingly. An accounting policy is deemed to be critical if itrequires an accounting estimate to be made based on assumptions about mattersthat are highly uncertain at the time the estimate is made, if differentestimates reasonably could have been used, or if changes in the estimate thatare reasonably likely to occur could materially impact the financialstatements. We believe that the estimates, assumptions and judgments involvedin revenue recognition, receivables and allowances for doubtful accounts,accruals including third party commissions payable, restructuring liabilities,litigation and other contingencies, stock-based compensation, product warranty,variable interest entities, inventories, deferred costs, research anddevelopment and capitalized software development costs, income taxes,impairment of intangible assets and long-lived assets, and valuation andimpairment of investments have the greatest potential impact on our condensedconsolidated financial statements, so we consider these to be our criticalaccounting policies. Management believes that there have been no significant changesduring the three months ended March 31, 2010 to the items that wedisclosed as our critical accounting policies and estimates in Management’sDiscussion and Analysis of Financial Condition and Results of Operations in ourAnnual Report on Form 10-K for the year ended December 31, 2009.

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

For a description of thenew accounting standards that affect us, see Note 2 of notes to ourcondensed consolidated financial statements included under Part I,Item 1 of this Quarterly Report on Form 10-Q.

 

**RESULTSOF OPERATIONS**

 

In the fourth quarter of2009, we substantially completed the wind-down of our handset business. Exceptfor sales relating to inventory clearing, we do not expect any significantrevenue from our handset segment in 2010. In addition, in order to optimize ourresources and improve efficiency, beginning on January 1, 2010 weintegrated our Services Segment into our Multimedia Communications andBroadband Infrastructure segments based on products for which services areperformed. Effective January 1, 2010 the new reporting segments are asfollows:

 

·                  Multimedia Communications—Focused on development andmarket opportunities in IPTV solutions and Wireless infrastructuretechnologies, including related services revenue.

 

·                  Broadband Infrastructure—Focused on our world classportfolio of broadband products, including related services revenue.

 

·                  Handsets—Focused on mobile phone business includingPAS and CDMA handset market, as well as data cards markets. Handset sales toPCD LLC, which commenced after the July 1, 2008 sale of PCD, areincluded in this segment.

 

We have reclassified ourpreviously reported segment information for the three months ended March 31,2009 to conform to the current segment presentation.

 

**NET SALES**

 
| ** **                 | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | ** **                            | ** ** | **% of net** | ** ** | ** ** | ** ** | **% of net** | ** ** |
| ** **                 | ** ** | **2010**                              | ** ** | **sales** | ** ** | **2009** | ** ** | **sales** | ** ** |
| ** **                 | ** ** | **(in thousands)**                    | ** ** |
| ***Net Sales by segment*** | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Multimedia  Communications |       | $                                     | 42,324     |   | 52 | % | $ | 42,484 |   | 36 | % |
| Broadband  Infrastructure  |       | 34,554                                |       | 43 | % | 20,795 |   | 17 | % |
| Handsets                   |       | 3,969                                 |       | 5 | % | 56,061 |   | 47 | % |
| Net sales                  |       | $                                     | 80,847     |   | 100 | % | $ | 119,340 |   | 100 | % |

 

23

----

Tableof Contents

 
| ** **                 | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | ** **                            | ** ** | **% of net** | ** ** | ** ** | ** ** | **% of net** | ** ** |
| ** **                 | ** ** | **2010**                              | ** ** | **sales** | ** ** | **2009** | ** ** | **sales** | ** ** |
| ** **                 | ** ** | **(in thousands)**                    | ** ** |
| ***Net Sales by  region*** | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| China                      |       | $                                     | 39,975     |   | 49 | % | $ | 51,219 |   | 43 | % |
| United States              |       | 3,453                                 |       | 4 | % | 41,259 |   | 35 | % |
| Japan                      |       | 11,096                                |       | 14 | % | 6,537 |   | 5 | % |
| Philippines                |       | 12,684                                |       | 16 | % | 805 |   | 1 | % |
| Other                      |       | 13,639                                |       | 17 | % | 19,520 |   | 16 | % |
| Net sales                  |       | $                                     | 80,847     |   | 100 | % | $ | 119,340 |   | 100 | % |

 

*Threemonths ended March 31, 2010 and 2009*

 

Net sales decreased by32% to $80.8 million during the three months ended March 31, 2010compared to the same period in 2009. The decrease was primarily due to thewind-down of our handset business which resulted in a decrease of $52.1 millionin revenue. This decrease was partially offset by the $13.8 million increase insales of Broadband Infrastructure segment as we recognized $11.9 million onMSAN product revenue from an international customer. Multimedia Communicationsnet sales remained stable at $42.3 million for the three months ended March 31,2010, mainly due to accelerated amortization of PAS deferred product revenue.

 

For additionaldiscussion, see the “Segment Reporting” section of this Item 2.

 

In 2010 and beyond, we donot expect significant new contracts for our PAS handsets and infrastructureequipment. As of March 31, 2010, we have approximately $165 million ofdeferred revenue associated with PAS infrastructure sales to be recognizedratably over the expected period of support. We review assumptions regardingthe estimated post contract support periods on a regular basis. Due to theChina telecommunication industry restructuring and launch of 3G services inChina, the Ministry of Industry and Information Technology of China announcedthat PAS services in China will be phased out by January 1, 2012. In thefourth quarter of 2009, we determined the remaining expected period of supportas 2 years and hence deferred revenue associated with PAS infrastructure is beingrecognized ratably beginning in the fourth quarter of 2009 through the fourthquarter of 2011. As a result of this change, net sales and gross profit in thefirst quarter of 2010 were increased by approximately $12.7 million and $4.5million, respectively. In both fiscal 2010 and 2011, total net sales and grossprofit associated with the amortization of all PAS-related deferred revenuewill approximate $93 million and $33 million, respectively.

 

The economic uncertaintythat we are operating in today could adversely impact our business. However,the majority of our business is based in China and India—two countries that arestill projected to have economic growth in 2010. We currently offer and haveinitial market acceptance of our IPTV products in China, India, Taiwan andother geographic regions. We believe that the IPTV market presents a meaningfulgrowth opportunity in these regions as well as other regions where we havetargeted to expand our IPTV offerings. Our growth in India, however, maybe adversely impacted by recent changes in India requiring all manufacturers tosatisfy certain security and supply chain standards to the satisfaction ofIndian authorities. We are working with the carriers who use our productto make sure we can satisfy these new requirements.

 

**GROSSPROFIT**

 
| ** **                    | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | ** **                            | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                    | ** ** | **2010**                              | ** ** | **Profit%** | ** ** | **2009** | ** ** | **Profit%** | ** ** |
| ** **                    | ** ** | **(in thousands)**                    | ** ** |
| ***Gross profit by segment*** | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Multimedia  Communications    |       | $                                     | 16,020     |   | 38 | % | $ | 12,867 |   | 30 | % |
| Broadband  Infrastructure     |       | 9,623                                 |       | 28 | % | 2,483 |   | 12 | % |
| Handsets                      |       | 1,566                                 |       | 39 | % | 6,302 |   | 11 | % |
| Total                         |       | $                                     | 27,209     |   | 34 | % | $ | 21,652 |   | 18 | % |

 

24

----

Table ofContents

 

Cost of sales consistsprimarily of material and labor costs, including stock-based compensation,associated with manufacturing, assembly and testing of products, costsassociated with installation and customer training, warranty costs, fees toagents, inventory write-downs and overhead. Cost of sales also includes importtaxes and tariffs on components and assemblies. Some components and materialsused in our products are purchased from a single supplier or a limited group ofsuppliers and, in some cases, are subject to obtaining Chinese import permitsand approvals. We also rely on third party manufacturers to manufacture andassemble most of our CDMA handsets.

 

Our gross profit has beenaffected by average selling prices, material costs, product mix, the impact of warrantycharges and contract loss provisions as well as inventory reserves and releaseof deferred revenues and related cost pertaining to prior years. Our grossprofit, as a percentage of net sales, varies among our product families. Weexpect that our overall gross profit, as a percentage of net sales, willfluctuate in the future as a result of shifts in product mix, stage of productlife cycle, anticipated decreases in average selling prices and our ability toreduce cost of sales.

 

*Threemonths ended March 31, 2010 and 2009*

 

Gross profit was$27.2 million, or 34%, of net sales, in the three months ended March 31,2010 compared to $21.7 million, or 18% of net sales, in the correspondingperiod of 2009. The overall gross profit increase both in absolute dollars andpercentage of net sales was primarily due to the acceleration of PASdeferred revenue amortization of Multimedia Communications segment and increased sales of highermargin TN products in the Broadband Infrastructure segment. In addition, duringthe first quarter of 2010, there was $0.9 million of sales in MultimediaCommunications segment of product which was previously fully written down.During the first quarter of 2009, we had lower gross margin due to additionalinventory reserves partially offset by an $8.5 million decrease to cost ofsales in the Handsets segment resulting from the amortization of the Marvellsupply agreement (See Note 3 of notes to our condensed consolidated financialstatements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.)

 

For additionaldiscussion, see “Segment Reporting” section of this Item 2.

 

**OPERATINGEXPENSES**

 

The following tablesummarizes our operating expenses:

 
| ** **                           | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| ** **                           | ** ** | ** **                            | ** ** | **% of net** | ** ** | ** ** | ** ** | **% of net** | ** ** |
| ** **                           | ** ** | **2010**                              | ** ** | **sales** | ** ** | **2009** | ** ** | **sales** | ** ** |
| ** **                           | ** ** | **(in thousands)**                    | ** ** |
| Selling, general and  administrative |       | $                                     | 30,190     |   | 37 | % | $ | 54,180 |   | 45 | % |
| Research and  development            |       | 10,023                                |       | 13 | % | 21,508 |   | 18 | % |
| Restructuring                        |       | 7,507                                 |       | 9 | % | 4,819 |   | 4 | % |
| Net gain on divestiture              |       | (1,752                                | )          | (2 | )% | — |   | — |   |
| Total net operating  expenses        |       | $                                     | 45,968     |   | 57 | % | $ | 80,507 |   | 67 | % |

 

Selling, general andadministrative expenses (“SG&A”) include compensation and benefits,professional fees, sales commissions, provision for doubtful accountsreceivable and travel and entertainment costs. Research and development(“R&D”) expenses consist primarily of compensation and benefits ofemployees engaged in research, design and development activities, costs ofparts for prototypes, equipment depreciation and third party developmentexpenses. We believe that continued and prudent investment in research anddevelopment is critical to our long-term success, and we will aggressivelyevaluate appropriate investment levels. A portion of our costs are fixed andare difficult to quickly reduce in periods of lower sales.

 

*SELLING,GENERAL AND ADMINISTRATIVE*

 

*Three months ended March 31,2010 and 2009*

 

SG&A expenses were$30.2 million for the three months ended March 31, 2010, a decrease of$24.0 million as compared to $54.2 million for the same period in 2009. Thedecrease in SG&A expense was primarily due to an $11.7 million decrease inpersonnel related expenses due to continuous streamlining of operations andrecent cost reduction 

 

25

----

Table of Contents

 

measures, a $4.4 milliondecrease in the provision for doubtful accounts, a $2.9 million reduction inlegal and accounting fees as a result of reduced activity in investigations andlitigation, a $1.6 million decrease in facility related expenses, a $1.3million reduction in advertising and marketing, sales promotions, as well asshows and exhibits expenses due to reduced sales activities, a $0.9 millionsavings from reduction in the use of outside services, and a $0.8 milliondecrease in travel related expenses due to reduced travel activity and costcontainment efforts.

 

*RESEARCHAND DEVELOPMENT*

 

*Three months ended March 31,2010 and 2009*

 

R&D expenses decreased by $11.5 millionduring the three months ended March 31, 2010 compared to the same periodin 2009. The decrease was mainly due to a $7.8 million decrease in personnelrelated expenses, $1.5 million savings from reduction in use of outsideservices, and a total of $1.9 million decrease in depreciation, softwarelicense, parts and facilities related expenses as we continued to streamlineour operations and wind down our handset business unit.

 

*RESTRUCTURING*

 

*Three months ended March 31,2010*

 

During the first quarterof 2010, we recorded approximately $7.5 million in restructuring charges ofwhich $7.1 million related to the 2009 Restructuring Plan and $0.4 millionrelated to the 2008 Restructuring Plan.

 

On June 9, 2009, ourBoard of Directors approved a restructuring plan (the “2009 Restructuring Plan”)designed to reduce our operating costs. The 2009 Restructuring Plan includes aworldwide reduction in force of approximately 50% of our headcount, orapproximately 2,300 employees located primarily in China and the United Statesand, to a lesser degree, other international locations. During the three monthsended March 31, 2010, we recorded restructuring costs of approximately$7.1 million related to the 2009 Restructuring Plan, net of approximately $0.3million of reversal of charges recorded in fiscal year 2009. The restructuringcosts for the three months ended March 31, 2010 primarily related toseverance and benefits related to additional employees included in theRestructuring Plan. Total restructuring costs recorded through March 31,2010 related to the 2009 Restructuring**Plan approximated $47.1 million.

 

During fiscal 2008, weimplemented a restructuring plan (the “2008 Restructuring Plan”) primarilyrelated to a global reduction in force across all functions and employeeterminations at certain non-core operations which we were in the process ofwinding down. The total number of employees affected totaled approximately 750,including 350 in China, 200 in Korea and 200 in other locations including theUnited States. During the three months ended March 31, 2010, we recordedadditional restructuring costs related to the 2008 Restructuring Plan ofapproximately $0.4 million for severance and benefit costs beingrecognized over the remaining service period for employees included in the 2008Restructuring Plan. Total restructuring costs recorded through March 31,2010 related to the 2008 Restructuring**Plan approximated $19.7 million.

 

*Threemonths ended March 31, 2009*

 

During the first quarter of 2009, we recordedapproximately $4.8 million in restructuring charges of which $4.6 millionrelated to the 2008 Restructuring Plan and $0.2 million related to a priorplan. The $4.6 million of chargesrelated to the 2008 Restructuring Plan included $3.4 million for severance andbenefits primarily related to the transition of key functions to China and $1.1million for lease termination costs. Approximately 60 employees are affected bythe transition of these key functions to China.

 

The majority of theremaining cash expenditures related to the 2009 and 2008 Restructuring Plansare expected to be paid in 2010. The remaining liabilities related to leaseobligations are expected to be settled over the remaining lease term. We expectto incur additional restructuring charges in 2010 as we continue to execute the2009 and 2008 Restructuring Plans.

 

26

----

Table of Contents

 

*STOCK-BASEDCOMPENSATION EXPENSE*

 

At March 31, 2010,there was approximately $7.4 million of total unrecognized compensationcost, as measured, related to non-vested stock options and restricted stock andrestricted stock units, which is expected to be recognized over aweighted-average period of 1.9 years. The following table summarizes thestock-based compensation expense in our consolidated statementof operations:

 
| ** **                           | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| ** **                           | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **                           | ** ** | **(in thousands)**                    | ** ** |
| Cost  of net sales                   |       | $                                     | 57         |   | $ | 430 |   |
| Selling,  general and administrative |       | 1,401                                 |       | 2,439 |   |
| Research  and development            |       | 208                                   |       | 897 |   |
| Restructuring                        |       | 1,194                                 |       | 380 |   |
| Total                                |       | $                                     | 2,860      |   | $ | 4,146 |   |

 

**OTHER INCOME (EXPENSE)**

 

*INTERESTINCOME*

 

*Threemonths ended March 31, 2010 and 2009*

 

Interest income was$0.3 million and $0.7 million for the three months ended March 31,2010 and 2009, respectively. The decrease in interest income was primarily dueto the effect of lower average cash balances and a decline in the averageinterest rate for the three months ended March 31, 2010 as compared to thethree months ended March 31, 2009.

 

*INTERESTEXPENSE*

 

*Threemonths ended March 31, 2010 and 2009*

 

Interest expense was $0.1 million and$0.3 million for the three months ended March 31, 2010 and 2009,respectively.

 

*OTHERINCOME (EXPENSE), NET*

 

*Threemonths ended March 31, 2010 and 2009*

 

Other income was$4.9 million for the three months ended March 31, 2010 as compared toother expense of $7.2 million for the three months ended March 31,2009. Other income for the three months ended March 31, 2010 was primarilydue to $4.1 million of foreign currency gains, a $0.4 million settlementproceeds with MRV Communications (“MRV”) related to our investment in MRV whichwas sold in 2009, and $0.4 million of other immaterial items. Other expense,net for the three months ended March 31, 2009 was primarily due to $7.3million of foreign currency losses.

 

*INCOMETAX EXPENSE*

 

Income tax expense isbased upon a blended effective tax rate based upon our expectation of theamount of income to be earned in each tax jurisdiction and is accounted forunder the liability method. Deferred income taxes are recognized for thedifferences between the tax bases of assets and liabilities and their financialstatement amounts based on enacted tax rates. Valuation allowances areestablished when necessary to reduce deferred tax assets to the amount expectedto be realized. We expect to maintain a full valuation allowance on ourremaining net deferred tax assets until an appropriate level of profitabilitythat generates taxable income is sustained or until we are able to develop taxstrategies that would enable us to conclude that it is more likely than notthat a portion of our deferred tax assets will be realizable. Any reversal ofvaluation allowances will favorably impact our results of operations in theperiod of the reversal.

 

FASB ASC 740-10establishes criteria for recognizing or continuing to recognize onlymore-likely-than-not tax positions, which may result in income tax expensevolatility in future periods. While we believe that we have adequately providedfor all tax positions, amounts asserted by taxing authorities could be greaterthan our accrued position. Accordingly, additional provisions on income taxrelated matters could be recorded in the future as revised estimates are madeor the underlying matters are settled or otherwise resolved.

 

27

----

Table of Contents

 

*Threemonths ended March 31, 2010 and 2009*

 

Income tax expense was$2.4 million for the three months ended March 31, 2010 compared to$1.8 million for the three months ended March 31, 2009. Income taxexpense for the three months ended March 31, 2009 included a one-time taxbenefit of $2.8 million related to the recognition of previously unrecognizedtax benefits and the reversal of interest and penalties due to statute oflimitations expirations and income tax audit settlements. The decrease inincome tax expense in the first quarter of 2010 compared with the first quarterof 2009, excluding the one-time tax benefit of $2.8 million, was primarily dueto the decreased ordinary income in jurisdictions where we have beenprofitable.

 

**SEGMENTREPORTING**

 

Summarized below are oursegment sales revenue and gross profit for the three months ended March 31,2010 and 2009, respectively.

 

***Multimedia Communications***

 
| ** **                                 | ** ** | **Three months ended March 31** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                   | ** ** |
| Net sales                                  |       | $                                    | 42,324     |   | $ | 42,484 |   |
| Gross profit                               |       | $                                    | 16,020     |   | $ | 12,867 |   |
| Gross profit as a  percentage of net sales |       | 38                                   | %          | 30 | % |

 

During the three monthsended March 31, 2010, sales of Multimedia Communications segment werestable at $42.3 as compared to the same period in 2009 as accelerated PASdeferred product revenue amortization offset decreases in revenue of all othermajor product lines. Amortization of PAS deferred product revenue accounted for$23.2 million or 55% of Multimedia Communication sales in the first quarter of2010, compared to $10.5 million or 25% in the same period in 2009.

 

The gross profit andgross profit as a percentage of net sales increased to $16.0 million and 38%,respectively, for the three months ended March 31, 2010 from $12.9 millionand 30% for the corresponding period in 2009. The increase in absolute dollarswas primarily due to increased PAS deferred product revenue. The increase ingross profit percentage was mainly due to lower inventory provision for PAS andNGN products in 2010 as well as $0.9 million sales of product which waspreviously fully written down.

 

We expect future PASinfrastructure spending to decline rapidly in 2010 and beyond as China launchedits 3G networks. We plan to aggressively pursueopportunities for our IPTV product portfolios in multiple markets. We believethat the IPTV market presents a meaningful growth opportunity. We currentlyoffer and have initial market acceptance of our IPTV products in China, India,Taiwan and other geographic regions.

 

***BroadbandInfrastructure***

 
| ** **                                 | ** ** | **Three months ended March 31** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                   | ** ** |
| Net sales                                  |       | $                                    | 34,554     |   | $ | 20,795 |   |
| Gross profit                               |       | $                                    | 9,623      |   | $ | 2,483 |   |
| Gross profit as a  percentage of net sales |       | 28                                   | %          | 12 | % |

 

Broadband Infrastructuresales increased by 66%, or $13.8 million during the three months ended March 31,2010, as compared to the same periods in 2009. The increase was mainly due tothe increase in sales of MSAN products as we recognized $11.9 million revenuefrom an international customer. In addition, TN and GEPON products sales alsoincreased during the first quarter of 2010. The increase was partially offsetby the decrease of MSTP sales in the first quarter of 2010. TN product revenue comprised approximately 14% and 1% of BroadbandInfrastructure sales for the three months ended March 31, 2010 and 2009,respectively. Softbankin Japan, one of our largest infrastructure customers, representedapproximately 31% and 30% of total Broadband sales during the three monthsended March 31, 2010 and 2009, respectively. 

 

28

----

Table of Contents

 

During the fourth quarterof 2009, we began recognizing revenue ratably on a significant customercontract over a seven year period; for the three months ended March 31,2010, we recognized revenue of $2.9 million and immaterial gross profit on thiscontract.

 

Gross profit percentageincreased to 28% for the threemonths ended March 31, 2010 from 12% for the corresponding period of 2009.The increase in gross profit percentage was primarily dueto lower provision for inventory in 2010compared to 2009, as well as increased sales of TN product with higher grossmargin.

 

We may incur additionalwarranty expense and inventory reserves as we introduce new products and may berequired to accrue additional contract losses for certain fixed price contractsas these contracts progress. These factors will result in negative impacts onour future gross margins, results of operations and financial position.

 

***Handsets***

 
| ** **                                 | ** ** | **Three months Ended March 31** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                   | ** ** |
| Net sales                                  |       | $                                    | 3,969      |   | $ | 56,061 |   |
| Gross profit                               |       | $                                    | 1,566      |   | $ | 6,302 |   |
| Gross profit as a  percentage of net sales |       | 39                                   | %          | 11 | % |

 

Net sales decreased by 93%, or $52.1 million for the three months ended March 31, 2010 compared to the sameperiod in 2009. The decrease was primarily due to the substantial wind-downof our worldwide handset business. Except for sales related to inventoryclearing, we do not expect any significant handset revenue in 2010.

 

Grossprofit as a percentage for our Handsets segment increased from 11% for thethree months ended March 31, 2009 to 39% for the corresponding period in2010. The increase was mainly due to inventory clearing sales of CDMA handsetsales to PCD LLC which had been previously reserved, partially offset byinventory clearing sales of CDMA handsets at very low margin in China in thefirst quarter of 2010. We incurred additional warranty reserve recorded duringthe three months ended March 31, 2009 due to additional repairs for one ofour handset products, and additional inventory reserve for our PAS handsets aswe anticipated decrease in demand after China launched its 3G networks. Theadditional PAS handset inventory reserve was partially offset by a decrease tocost of sales from the amortization of the Marvell supply agreement.

 

**RELATEDPARTY TRANSACTIONS**

 

*Softbankand affiliates*

 

We recognize revenue withrespect to sales of telecommunications equipment to affiliates of Softbank, asignificant stockholder of the Company. Softbank offers ADSL coveragethroughout Japan, which is marketed under the name “YAHOO! BB.” We supportSoftbank’s fiber-to-the-home service through sales of its carrier class GEPONproduct as well as its NetRingÔ product. In addition, we supportSoftbank’s new internet protocol television (“IPTV”), through sales of itsRollingStreamÔ product. During the three months ended March 31,2010 and 2009, we recognized revenue and related cost of net sales for sales oftelecommunications equipment and services to affiliates of Softbank as follows.

 
| ** **        | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------|------------|---------------------------------------|------------|
| ** **        | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **        | ** ** | **(in thousands)**                    | ** ** |
|              |       |                                  |       |   |   |
| Net sales         |       | $                                     | 10,674     |   | $ | 6,165 |   |
| Cost of net sales |       | 5,094                                 |       | 3,917 |   |
| Gross profit      |       | $                                     | 5,580      |   | $ | 2,248 |   |

 

29

----

Table of Contents

 

Gross profit as apercentage of net sales fluctuations are expected and primarily result fromchanges in product mix. Included in accounts receivable at March 31, 2010and December 31, 2009 were $10.7 million and $5.5 million,respectively, related to these transactions.

 

Sales to Softbank includea three year service period and a penalty clause if product failure ratesexceed a certain level over a seven year period. As of March 31, 2010 and December 31,2009, our customer advance balance related to Softbank agreements was $0.2million and $0.2 million, respectively. The current deferred revenue balancerelated to Softbank was $1.1 million and $1.4 million as of March 31, 2010and December 31, 2009, respectively. As of March 31, 2010, ournoncurrent deferred revenue balance related to Softbank was $9.1 millioncompared to $8.8 million as of December 31, 2009.

 

As discussed in Note 6 toour condensed consolidated financial statements included under Part 1,Item 1 of this Quarterly Report on Form 10-Q, we have a $1.1 millioninvestment in SBI. Affiliates of Softbank have a controlling interest in SBI.

 

As of March 31,2010, Softbank beneficially owned approximately 11% of our outstanding stock.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

**Liquidityand Capital Resources**

 

Thefollowing sections discuss the effects of changes in our balance sheet and cashflows, contractual obligations and other commitments on our liquidity andcapital resources.

 

***Balance Sheetand Cash Flows***

 

Cashand Cash Equivalents and Short-term Investments

 
| ** **                           | ** ** | **March 31,**  | ** ** | **December 31,** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|---------------------|------------|-----------------------|------------|------------|------------|
| ** **                           | ** ** | **2010**            | ** ** | **2009**              | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **(in  thousands)** | ** ** |
|                                 |       |                |       |                  |       |       |       |
| Cash and cash  equivalents           |       | $                   | 234,441    |                  | $          | 265,843    |       | $ | (31,402 | ) |
| Short-term investments  - Bank notes |       | 279                 |       | 1,038                 |       | (759       | )          |
| Total                                |       | $                   | 234,720    |                  | $          | 266,881    |       | $ | (32,161 | ) |
|                                 |       |                |       |                  |       |       |       |

 
| ** **                                                    | ** ** | **Three months  ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                    | ** ** | **2010**                                    | ** ** | **2009** | ** ** | **Change** | ** ** |
| ** **                                                    | ** ** | **(in  thousands)**                         | ** ** |
| Cash used in operating  activities                            |       | $                                           | (44,115    | ) | $ | (12,007 | ) | $ | (32,108 | ) |
| Cash provided by  investing activities                        |       | 11,443                                      |       | 4,600 |   | 6,843 |   |
| Cash used in financing  activities                            |       | (25                                         | )          | (163 | ) | 138 |   |
| Effect of exchange rate  changes on cash and cash equivalents |       | 1,295                                       |       | (2,463 | ) | 3,758 |   |
|                                                          |       |                                        |       |   |   |   |   |
| Net decrease in cash  and cash equivalents                    |       | $                                           | (31,402    | ) | $ | (10,033 | ) | $ | (21,369 | ) |

 

Cashand cash equivalents, consisting primarily of bank deposits and money marketfunds, are recorded at cost which approximates fair value because of the short-term nature ofthese instruments. At March 31,2010, cash and cash equivalents approximating $115.3 million was held by oursubsidiaries in China.

 

30

----

Table of Contents

 

Cashused in operating activities during the three months ended March 31, 2010of $44.1 million resulted primarily from the net loss of $16.0 million,adjusted for $2.2 million gains from investing activities, and by changes innet operating assets and liabilities using net cash of $34.8 million, partiallyoffset by non-cash charges including $2.0 million of depreciation andamortization, $2.9 million stock-based compensation and $4.0 million provisionfor doubtful accounts. Cash used in operating activities during the threemonths ended March 31, 2009 of $12.0 million resulted primarily from thenet loss of $67.4 million offset by non-cash charges including $3.5 million ofdepreciation and amortization, $4.1 million stock-based compensation and $8.3million provision for doubtful accounts and also offset by changes in netoperating assets and liabilities providing net cash of $39.6 million. Thedecrease in sales activity in the first quarter of 2009 was the primary driverof the changes in operating assets and liabilities.

 

Cashprovided by investing activities during the three months ended March 31,2010 of $11.4 million included net proceeds from divestiture of $1.5 million,deposit received on pending sale of building of $6.6 million, and changes inrestricted cash of $5.0 million, offset partially by cash outflows including$1.8 million for net purchases of short-term investments, $0.5 million forpurchases of property, plant and equipment and $0.6 million for purchase of aninvestment interest. Cash provided by investing activities duringthe three months ended March 31, 2009 of $4.6 million included netproceeds from the sale of short-term investments of $3.3 million and changes inrestricted cash of $2.1 million, offset partially by cash outflows including$1.1 million for purchases of property, plant and equipment.

 

Cash used infinancing was immaterial during the three months ended March 31, 2010 and2009.

 

Accounts Receivable, Net

 

Accounts receivableincreased $2.4 million from $42.3 million at December 31, 2009 to $44.7million at March 31, 2010. At March 31, 2010, our allowance fordoubtful accounts was $30.1 million on gross receivables of $74.8 million. Weassess collectability of receivables based on a number of factors includinganalysis of creditworthiness, our customer’s historical payment history andcurrent economic conditions, our ability to collect payment and on the lengthof time an individual receivable balance is outstanding. We have certainaccounts receivable in China that have been outstanding for a significantperiod of time. We provide allowances for these receivables based on thecriteria discussed above. While we believe we have sufficient experience andknowledge of the China market and customer payment patterns to reasonablyestimate such allowances, actual payment patterns and customer behavior coulddiffer from our expectations.

 

Inventories and DeferredCosts

 

The following table summarizes our inventories anddeferred costs:

 
| ** **                 | ** ** | **March 31,**  | ** ** | **December 31,** | ** ** | **Increase**   | ** ** |
|----------------------------|------------|---------------------|------------|-----------------------|------------|----------------|------------|
| ** **                 | ** ** | **2010**            | ** ** | **2009**              | ** ** | **(Decrease)** | ** ** |
| ** **                 | ** ** | **(in  thousands)** | ** ** |
| Inventories:               |       |                |       |                  |       |           |       |
| Raw materials              |       | $                   | 16,874     |                  | $          | 18,863         |       | $ | (1,989 | ) |
| Work in-process            |       | 15,712              |       | 12,881                |       | 2,831          |       |
| Finished goods             |       | 38,979              |       | 40,556                |       | (1,577         | )          |
| Total inventories          |       | $                   | 71,565     |                  | $          | 72,300         |       | $ | (735 | ) |
|                       |       |                |       |                  |       |           |       |
| Short-term deferred  costs |       | $                   | 127,909    |                  | $          | 130,453        |       | $ | (2,544 | ) |
| Long-term deferred  costs  |       | $                   | 173,673    |                  | $          | 184,978        |       | $ | (11,305 | ) |

 

Inventories consist ofproduct held at our manufacturing facility and warehouses, as well as finishedgoods at customer sites for which the customer has taken possession, but basedon specific contractual terms, title has not yet passed to the customer. Finishedgoods at customer sites were approximately $29.1 million and $33.8 million at March 31,2010 and December 31, 2009, respectively.

 

31

----

Table ofContents

 

***Liquidity***

 

We have incurred netlosses of $225.7 million, $150.3 million and $195.6 million duringthe years ended December 31, 2009, 2008 and 2007, respectively. During thethree months ended March 31, 2010, we incurred a net loss of $16.0million. We have recorded operating losses in 20 of the 21 consecutivequarters in the period ended March 31, 2010. At March 31, 2010, wehave an accumulated deficit of $1,083.1 million. We incurred net cashoutflows from operations of $67.4 million, $55.2 million and$225.1 million in 2009, 2008 and 2007 respectively. Cash used inoperations was $44.1 million during the three months ended March 31, 2010.While operating results are expected to improve in 2010 compared with prioryears, we expect to continue to incur losses in 2010.

 

At March 31, 2010,we had cash and cash equivalents of $234.4 million, of which$115.3 million was held by our subsidiaries in China. The amount of cashavailable for transfer from the China subsidiaries will be limited both by theliquidity needs of the subsidiaries in China and the restriction on currencyexchange by Chinese-government mandated requirements including currencyexchange controls on certain transfers of funds outside of China.

 

At March 31, 2010,we had no available credit facilities. In April 2010, we entered into acredit facility totaling $14.7 million, which can be used for the issuanceof the letters of credit and the guarantees. This facility expires in April 2011.

 

Global economies haveexperienced a significant downturn driven by a financial and credit crisis thatwill continue to challenge such economies for some period of time. Under thecurrent macroeconomic environment there are significant risks and uncertaintiesinherent in management’s ability to forecast future results. The operatingenvironment confronting us, both internally and externally, raises significantuncertainties.

 

In 2009 and 2008, we tooka number of actions to improve our liquidity. In March 2008, we paid$289.5 million to retire our convertible subordinated notes and relatedaccrued interest. On July 1, 2008, we completed the sale of PCD. Inaddition, we divested our Mobile Solutions Business Unit in July 2008. Inthe fourth quarter of 2008, management initiated actions to disband our CustomsSolutions Business Unit, to wind down our Korea based handset operations, andannounced initiatives including efforts to eliminate functional duplications byconsolidation of a number of functions into our China operations. In June 2009,management expanded the initiatives to include a worldwide reduction inworkforce, outsourcing of manufacturing operations and optimizing research anddevelopment spending with a focus on selected products. Our year-to-yearquarterly selling, general and administrative and research and developmentoperating expenses decreased significantly in 2009 compared with 2008 andmanagement believes the continuing efforts to stream-line operations willenable our fixed cost base to be better aligned with operations, market demandand projected sales levels. If projected sales do not materialize, we will needto take further actions to reduce costs and expenses or explore other costreduction options.

 

In December 2009, weentered into a Sales Leaseback Agreement for the sale of our manufacturing,research and development, and administrative offices facility in Hangzhou,China to another third party for approximately $140 million with leasebackof a portion of the facility. To date, we have received proceeds ofapproximately $13.9 million on the transaction. On March 8, 2010, weobtained an irrevocable bank guarantee letter from the buyer for the remainingamount of the cash proceeds from the Sale Leaseback Agreement. In April 2010,an additional $55.9 million of sales proceeds were placed in escrow by thebuyer. The agreement is expected to close in the second quarter of 2010 andwill provide additional cash for working capital and general purposes.

 

On February 1, 2010,we entered into agreements for a strategic relationship with Beijing E-townInternational Investment and Development Co., Ltd (“BEIID”) whichincludes an investment of $48.5 million in our common stock by BEIID, andtwo unrelated investment funds, Elite Noble Limited and Shah CapitalOpportunity Fund LP. These agreements are expected to close in the secondquarter of 2010 and will provide additional cash for working capital andgeneral purposes.

 

Management believes thatboth our China and non-China operations will have sufficient liquidity tofinance working capital and capital expenditure needs during the next12 months. If we are not able to execute our plan successfully, we mayneed to obtain funds from equity or debt financings. There can be no assurancethat additional financing, if required, will be available on terms satisfactoryto us or at all, and if funds are raised in the future through issuance ofpreferred stock or debt, these securities could have rights, privileges orpreference senior to those of our common stock and newly issued debt couldcontain debt covenants that impose restrictions on our operations. Further, anysale of newly issued debt or equity securities could result in additionaldilution to our current shareholders.

 

32

----

Table of Contents

 

***Income taxes***

 

The China CorporateIncome Tax Law (“CIT Law”) became effective on January 1, 2008. Under theCIT Law, China’s dual tax system for domestic enterprises and foreigninvestment enterprises (“FIEs”) was effectively replaced by a unified system.The new law establishes a tax rate of 25% for most enterprises and a reducedtax rate of 15% for certain qualified high technology enterprises.

 

Prior to this change intax law, certain subsidiaries and joint ventures located in China enjoyed taxbenefits in China which were generally available to FIEs. The taxholidays/incentives for FIEs were applicable or potentially applicable toUTStarcom ChongQing Telecom Co. Ltd. (“CUTS”), UTStarcomTelecom Co., Ltd. (“HUTS”) and UTStarcom China Co., Ltd. (“UTSC”),our active subsidiaries in China, as those entities may qualify as accreditedtechnologically advanced enterprises.

 

The CIT Law targetscertain industries for the reduced 15% tax rate for certain qualified hightechnology enterprises. For FIEs established before the promulgation of the newlaw who had previously enjoyed lower tax rates, any increase in their tax rateswould be gradually phased in over five years. During the fourth quarter of2008, two of our China subsidiaries, HUTS and UTSC, were approved for thereduced 15% tax rate. The approval lasts for three years and is retroactive to January 1,2008.

 

The Chinese centralgovernment may review and audit tax benefits granted by local or provincialauthorities and could determine to disallow such benefits. Certain of oursubsidiaries and joint ventures located in China enjoy tax benefits in Chinathat are generally available to foreign investment enterprises. If these taxbenefits are reduced, disallowed or repealed due to changes in tax laws ordetermination by the Chinese government, our business could suffer.

 

***Off-balancesheet arrangements***

 

At March 31, 2010,we do not have any off-balance sheet arrangements.

 

***Contractualobligations and other commitments***

 

Our obligations undercontractual obligations and commercial commitments at March 31, 2010 wereas follows:

 
| ** **            | ** ** | **Payments Due by Period** | ** ** |
|-----------------------|------------|----------------------------|------------|
| ** **            | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More than  5 years** | ** ** |
| ** **            | ** ** | **(in thousands)**    | ** ** |
| Operating  leases     |       | $                          | 10,242     |   | $ | 5,800 |   | $ | 4,105 |   | $ | 337 |   | $ | — |   |
| Letters  of credit    |       | 25,666                     |       | 14,967 |   | 10,549 |   | 150 |   | — |   |
| Purchase  commitments |       | 48,373                     |       | 47,547 |   | 826 |   | — |   | — |   |
| Total                 |       | $                          | 84,281     |   | $ | 68,314 |   | $ | 15,480 |   | $ | 487 |   | $ | — |   |

 

*Operatingleases*

 

We lease certainfacilities under non-cancelable operating leases that expire at various datesthrough 2013. In connection with the Sale Leaseback Agreement, on February 1,2010, we entered into a Lease Contract (the “Lease”) with respect to theleaseback of a portion of the Hangzhou facility. The Lease becomes effectiveupon the closing of the sale transaction. The Lease terms require total cashpayments of approximately $11.5 million in each of years 1 and 2,$13.4 million in each of years 3 and 4, and $14.2 million in each ofyears 5 and 6. The contractual obligations related to the Hangzhou facilityLease are excluded from the table above as the Lease has not commenced.

 

*Letters of credit*

 

We issue standby lettersof credit primarily to support international sales activities outside of Chinaand in support of purchase commitments. When we submit a bid for a sale, oftenthe potential customer will require that we issue a bid bond or a standby letterof credit to demonstrate our commitment through the bid process. In addition,we may be required to issue standby letters of credit as guarantees for advancecustomer payments upon contract signing or performance guarantees. The standbyletters of credit usually expire six to twelve months from date of issuancewithout being drawn by the beneficiary thereof.

 

33

----

Table of Contents

 

*Purchase commitments*

 

We are obligated topurchase raw materials and work-in-process inventory under various orders fromvarious suppliers, all of which should be fulfilled without adverseconsequences material to our operations or financial condition. Purchasecommitments in the table above include agreements that are cancelable withoutpenalty.

 

*Intellectual property*

 

Certain sales contractsinclude provisions under which customers would be indemnified by us in theevent of, among other things, a third-party claim against the customer forintellectual property rights infringement related to our products. There are nolimitations on the maximum potential future payments under these guarantees. Wehave not accrued any amounts in relation to these provisions as no such claimshave been made and we believe we have valid enforceable rights to theintellectual property embedded in our products.

 

*Uncertain tax positions*

 

As of March 31,2010, we had $91.5 million of gross unrecognized tax benefits. If recognized, theportion of gross unrecognized tax benefits that would decrease the provisionfor income taxes and decrease our net loss is $13.4 million. The impact onnet loss reflects the gross unrecognized tax benefits net of certain deferredtax assets and the federal tax benefit of state income tax items totaling $78.1million. We have not included these amounts in the table of contractualobligations and commercial commitments because of the difficulty in makingreasonably reliable estimates of the timing of cash settlements with therespective taxing authorities.

 

*Third Party Commissions*

 

The Company recordsaccruals for commissions payable to third parties in the normal course ofbusiness. Such commissions are recorded based on the terms of the contractsbetween the Company and the third parties and paid pursuant to such contracts.Consistent with our accounting policies, these commissions are recorded asoperating expense in the period in which the liability is incurred. As of March 31,2010, approximately $6.3 million of such accrued commissions had not beenclaimed by the third parties for more than three years. Management hasperformed, and continues to perform, follow-up procedures with respect to theseaccrued commissions. Upon completion of such follow-up procedures, if theaccrued commissions have not been claimed and the statute of limitations, ifany, has expired or a reasonable period of time has elapsed, the Company willreverse such accruals. Such reversals will be recorded in the Statementof Operations during the period management determines that such accrualsare no longer necessary. During the three months ended March 31, 2010 and2009, no accruals related to third party commissions were reversed.

 

**ITEM3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to theimpact of interest rate changes, changes in foreign currency exchange rates andchanges in the stock market.

 

***Interest RateRisk***

 

Our exposure to marketrisk for changes in interest rates relates primarily to our investmentportfolio. The fair value of our investment portfolio would not besignificantly affected by either a 10% increase or decrease in interest ratesdue mainly to the short term nature of most of our investment portfolio.However, our interest income can be sensitive to changes in the general levelof U.S and China interest rates since the majority of our funds are invested ininstruments with maturities of less than one year. In a declining interest rateenvironment, as short term investments mature, reinvestment occurs at lessfavorable market rates. Given the short term nature of certain investments,anticipated declining interest rates will negatively impact our investmentincome.

 

34

----

Table of Contents

 

We maintain an investmentportfolio of various holdings, types and maturities. We do not use derivativefinancial instruments. We place our cash investments in instruments that meet highcredit quality standards, as specified in our investment policy guidelines. Ourpolicy is to limit the risk of principal loss and to ensure the safety ofinvested funds by generally attempting to limit market risk. Funds in excess ofcurrent operating requirements are mostly invested in money market funds whichare rated AAA. Our cash and cash equivalents are not subject to significantinterest rate risk due to the short maturities of these instruments. As of March 31,2010 the carrying value of our cash and cash equivalents approximatedfair value.

 

The table belowrepresents carrying amounts and related weighted-average interest rates of ourinvestment portfolio at March 31, 2010:

 
| ** **                    | ** ** | **(in thousands, except** | ** ** |
|-------------------------------|------------|-------------------------------------|------------|
| ** **                    | ** ** | **interest rates)**            | ** ** |
| Cash  and cash equivalents    |       | $                                   | 234,441    |   |
| Average  interest rate        |       | 0.47                                | %          |
|                          |       |                                |       |
| Restricted  cash - short-term |       | $                                   | 20,941     |   |
| Average  interest rate        |       | 0.11                                | %          |
|                          |       |                                |       |
| Short-term  investments       |       | $                                   | 279        |   |
| Average  interest rate        |       | 0.00                                | %          |
|                          |       |                                |       |
| Restricted  cash - long-term  |       | $                                   | 11,122     |   |
| Average  interest rate        |       | 0.01                                | %          |
|                          |       |                                |       |
| Total  investment securities  |       | $                                   | 266,783    |   |
| Average  interest rate        |       | 0.42                                | %          |

 

***Investment Risk***

 

We have invested inseveral privately held companies as well as investment funds which investprimarily in privately held companies, many of which can still be considered inthe start-up or development stages. These investments are inherently risky, asthe market for the technologies or products they have under development aretypically in the early stages and may never materialize.

 

***ForeignExchange Rate Risk***

 

As a multinationalcompany, we conduct our business in a wide variety of currencies and aretherefore subject to market risk for changes in foreign exchange rates. Weexpect to continue to expand our business globally and, as such, expect that anincreasing proportion of our business may be denominated in currencies otherthan U.S. Dollars. As a result, fluctuations in foreign currencies may have amaterial impact on our business, results of operations and financial condition.

 

Historically, the majorityof our foreign-currency denominated sales have been made in China, denominatedin Renminbi. Additionally, during 2006, 2007, 2008 and through the firstquarter of 2009, we made significant sales in Japanese Yen, Euros, IndianRupees and Canadian Dollars. Due to China’s currency exchange controlregulations, we are limited in our ability to convert and repatriate Renminbi,as well as in our ability to engage in foreign currency hedging activities inChina. The balance of our cash and cash equivalents held in China was $115.3million at March 31, 2010. Since China un-pegged the Renminbi from theU.S. Dollar in July, 2005, through March 31, 2010, the Renminbi hasstrengthened by more than 15% versus the U.S. Dollar. However, it is uncertainwhat further adjustments may be made in the future.

 

We may manage foreigncurrency exposures using forward and option contracts to hedge and thusminimize exposure to the risk of the eventual net cash inflows and outflowsresulting from foreign currency denominated transactions with customers,suppliers, and non-U.S. subsidiaries, however, we are not currently hedging anysuch transactions. As our foreign currency balances are not currently hedged,any significant revaluation of our foreign currency exposures may materiallyand adversely effect on our business, results of operation and financialcondition. We do not enter into foreign exchange forward or option contractsfor trading purposes.

 

Given our exposure tointernational markets, we regularly monitor all of our material foreigncurrency exposures. We use sensitivity analysis to measure our foreign currencyrisk by computing the potential decrease in cash flows that may result fromadverse or beneficial changes in foreign exchange rates, relative to thefunctional currency with all other variables 

 

35

----

Table of Contents

 

held constant. Theanalysis covers all of our underlying exposures for foreign currencydenominated financial instruments. The foreign currency exchange rates usedwere based on market rates in effect at March 31, 2010. The sensitivityanalysis indicated that a hypothetical 10% adverse or beneficial movement inexchange rates would have resulted in a loss or gain in the fair values of ourforeign currency denominated financial instruments of $20.8 million at March 31,2010.

 

**ITEM 4—CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

UTStarcom, Inc.(“UTStarcom” or the “Company”) maintains disclosure controls and proceduresthat are designed to ensure that information required to be disclosed in thereports the Company files or submits pursuant to the Securities Exchange Act of1934, as amended (“Exchange Act”), is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s (“SEC”) rules and forms, and that such information isaccumulated and communicated to the Company’s management, including its chiefexecutive officer (“CEO”) and chief financial officer (“CFO”), as appropriate,to allow timely decisions regarding required financial disclosure.

 

In connection withthe preparation of this Quarterly Report on Form 10-Q (“Form 10-Q”),the Company carried out an evaluation as of March 31, 2010 under thesupervision and with the participation of the Company’s management, includingthe CEO and CFO, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act. Based upon this evaluation, managementconcluded that as of March 31, 2010 the Company’s disclosure controls andprocedures were not effective because of the material weaknesses described in “Management’sAnnual Report on Internal Control over Financial Reporting,” included in “Part II,Item 9A - Controls and Procedures” (“Item 9A”) in the Company’s Annual Reporton Form 10-K for the fiscal year ended December 31, 2009 (the “2009Annual Report”), which have not yet been remediated. Investors are directed toItem 9A in the 2009 Annual Report for the description of these weaknesses.

 

A “materialweakness” is a deficiency, or a combination of deficiencies, in internalcontrol over financial reporting, such that there is a reasonable possibilitythat a material misstatement of the Company’s annual or interim financialstatements will not be prevented or detected on a timely basis. To address thematerial weaknesses in internal control over financial reporting noted above,the Company performed additional analyses and other procedures (as furtherdescribed below under “Management’s Planned Remediation Initiatives and InterimMeasures”) to ensure that the Company’s consolidated financial statements wereprepared in accordance with generally accepted accounting principles in theUnited States (“GAAP”). Accordingly, the Company’s management believes that theconsolidated financial statements included in this Form 10-Q fairlypresent in all material respects the Company’s financial condition, results ofoperations and cash flows for the periods presented and that this Form 10-Qdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the periods covered by this report.

 

**Management’sPlanned Remediation Initiatives and Interim Measures**

 

The Company plansto make necessary changes and improvements to the overall design of its controlenvironment to address the material weaknesses in internal control overfinancial reporting noted above. In particular, the Company implemented during2009 and the first quarter of 2010, and plans to continue to implement during2010, the specific measures described below. In addition, in connection withthe March 31, 2010 quarter-end reporting process, the Company hasundertaken additional measures described under the subheading “Interim Measures”below to provide reasonable assurance regarding the reliability of financialreporting and the preparation of the Company’s consolidated financialstatements included in this Form 10-Q and to ensure that materialinformation relating to the Company and its consolidated subsidiaries was madeknown to management in connection with the preparation of this Form 10-Q.

 

***Remediation Initiatives***

 

1. To remediate thematerial weakness described in Item 9A in the 2009 Annual Report over “*The recording of reserves for losses on customercontracts,*” the Company transitioned the responsibility forcalculating the loss contract reserves to its local project office in India inthe third and further quarters of 2008, which facilitated enhanced coordinationbetween the local business units, operations, sales and the finance teamsresulting in more timely and complete information available to Finance toanalyze. During the third quarter of 2009, the Company finalized its assessmentof additional implemented modules of its ERP system in the operation in India,which 

 

36

----

Table of Contents

 

enhanced the overall monitoring and analysis of thevarious accounts and balances in India. Although we believe that these enhancedprocedures improved the accuracy of the loss reserve calculation, they did notoperate for an adequate period of time to ensure effective remediation as of March 31,2010. In the remainder of 2010, the Company will continue performing thecurrent procedures and make further enhancements, if needed, to confirm fulland effective remediation.

 

2. To remediate thematerial weakness described in Item 9A in the 2009 Annual Report over “*Period-end financial reporting process*”the Company added technical resources to the finance team in China in the thirdand fourth quarters of 2009 as well as the first quarter of 2010. In theremainder of 2010, the Company will continue its effort to consolidate andstreamline its global close process in China, the additional technicalresources will enable the Company to broaden the scope and quality of theindependent reviews of underlying information related to the Company’speriod-end financial reporting process, to standardize the processes for suchfinancial reviews and to ensure the reviewers analyze and monitor financialinformation in a consistent and thorough manner.

 

3. To remediate thematerial weakness described in Item 9A in the 2009 Annual Report over “*internal control over financial reporting related torevenue recognition,*” the Company will enhance its contracts reviewprocess in order to ensure that appropriate members of management have reviewedand confirmed critical information necessary to assess the proper revenuerecognition accounting. The Company will continue to assess and enhance itstechnical resources to broaden the scope and quality of the independent reviewsof underlying information related to the revenue contracts.

 

**InterimMeasures**

 

Management has notyet implemented all of the measures described above under the heading “*Remediation Initiatives*” and/or testedthem. Nevertheless, management believes the measures identified above to theextent they have been implemented, together with other measures undertaken bythe Company in connection with the preparation of the condensed consolidatedfinancial statements included in this Form 10-Q and described below,address the material weaknesses in internal control over financial reportingdescribed above. These other measures include the following:

 

1. Extensive reviews ofthe reserves for losses on customer contracts including, in India, reviews ofthe inventory cost against the current cost backlog report and reconciliationbetween the local cost records to the cost records at the Company’sheadquarters.

 

2. A variety of manualreview procedures, such as an extensive review of journal entry postings intothe ERP system, a thorough review of account reconciliations, including revenueand deferred revenue accounts, and a detailed review at its headquarters oftrial balances including those issued from decentralized locations, to ensurethe completeness and accuracy of the underlying financial information used togenerate the consolidated financial statements.

 

3. Various reviews of therevenue contracts and associated accounting memos as well as the consolidatedrevenue schedules and fulfillment status reports to ensure that revenue isaccurately and completely recorded.

 

***Management’s Conclusion***

 

Management believesthe remediation measures described under “Management’s Planned RemediationInitiatives and Interim Measures” above will strengthen the Company’s internalcontrol over financial reporting and remediate the material weaknessesidentified above. However, management has not yet implemented all of thesemeasures and/or tested them. Management believes that the interim measuresdescribed under “Management’s Planned Remediation Initiatives and InterimMeasures” above ensure the reliability of financial reporting and thepreparation of the Company’s financial statements included in this Form 10-Qand has discussed this with the Company’s Audit Committee.

 

The Company iscommitted to continuing to improve its internal control processes and willcontinue to diligently and vigorously review its disclosure controls andprocedures and its internal control over financial reporting in order to ensurecompliance with the requirements of Section 404 of the Sarbanes-Oxley Actof 2002. However, any control system, regardless of how well designed, operatedand evaluated, can provide only reasonable, not absolute, assurance that itsobjectives will be met. As management continues to evaluate and work to improvethe Company’s internal control over financial reporting, it may determine totake additional or alternate measures to address control deficiencies, and itmay determine not to complete certain of the measures described under “Management’sPlanned Remediation Initiatives and Interim Measures” above.

 

37

----

Table of Contents

 

**Changesin Internal Control over Financial Reporting**

 

No changes otherthan those described above occurred during the three months ended March 31,2010 in our internal control over financial reporting that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**PART II—OTHERINFORMATION**

 

**ITEM 1—LEGALPROCEEDINGS**

 

For a description oflitigation and governmental investigations, see Note 10 to our condensedconsolidated financial statements included under Part 1, Item 1 of thisQuarterly Report on Form 10-Q.

 

**ITEM 1A—RISKFACTORS**

 

For a description of risk factors that could materially affect ourbusiness, financial condition and future operating results, please consider therisk factors set forth in “Part I, Item 1A — Risk Factors” of our AnnualReport on Form 10-K for the fiscal year ended December 31, 2009.Additional risks and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially and adversely affect ourbusiness, financial condition or future operating results.

 

**ITEM 2—UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

There were no unregistered sales of equity securitiesduring the period covered by this report.

 

**IssuerPurchases of Equity Securities**

 

**Thefollowing table summarizes the Company’s stock repurchase activity for thethree months ended March 31, 2010:**

** **
| ** **         | ** ** | ** **                  | ** ** | ** **          | ** ** | **Total  number of shares**     | ** ** | **Approximate  dollar value**   | ** ** |
|--------------------|------------|-----------------------------|------------|---------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **         | ** ** | ** **                  | ** ** | ** **          | ** ** | **purchased  as**               | ** ** | **of  shares that**             | ** ** |
| ** **         | ** ** | **Total  number of shares** | ** ** | **Average  price**  | ** ** | **part  of publicly announced** | ** ** | **may  yet be purchased under** | ** ** |
| **Period**         | ** ** | **Purchased  (1)**          | ** ** | **paid  per share** | ** ** | **plans  or programs**          | ** ** | **the  plans or programs**      | ** ** |
|               |       |                        |       |                |       |                            |       |                            |       |
| January 2010  |       | —                      |       | $                   | —     |                            | —     |                            | $          | — |   |
| February 2010 |       | 10,243                      |       | $                   | 2.13       |                            | —     |                            | $          | — |   |
| March 2010    |       | 1,403                       |       | $                   | 2.19       |                            | —     |                            | $          | — |   |
| Total              |       | 11,646                      |       |                |       | —                          |       | $                               | —     |   |

 

----

(1)          During the first quarter of 2010, the Company acquired11,646 shares of common stock that employees presented to the Company tosatisfy withholding taxes in connection with the vesting of restricted stockawards.

 

**ITEM 3—DEFAULTSUPON SENIOR SECURITIES**

 

None

 

**ITEM 4—REMOVEDAND RESERVED**

 

**ITEM 5—OTHERINFORMATION**

 

None

 

38

----

Table of Contents

 

**ITEM 6—EXHIBITS**

** **
| **Exhibit  Number** | ** ** | **Description** | ** **                                                                                                                                                                                                              | **Form** | ** ** | **Incorporated  by Reference  From Exhibit  Number** | ** ** | **Date Filed** |
|---------------------|------------|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|------------|------------------------------------------------------|------------|----------------|
|                |       |            |                                                                                                                                                                                                                    |     |       |                                                 |       |           |
| 3.1                 |       |            | Thirteenth Amended and  Restated Certificate of Incorporation of UTStarcom, Inc., as amended.                                                                                                                      |     | 8-K        |                                                 | 3.1        |           | 12/12/2003 |
|                |       |            |                                                                                                                                                                                                                    |     |       |                                                 |       |           |   |
| 3.2                 |       |            | Second Amended and  Restated Bylaws of UTStarcom, Inc., as effective June 28, 2008.                                                                                                                           |     | 8-K        |                                                 | 3.1        |           | 4/14/2008 |
|                |       |            |                                                                                                                                                                                                                    |     |       |                                                 |       |           |   |
| 4.1                 |       |            | See exhibits 3.1  and 3.2 for provisions of the Certificate of Incorporation and Bylaws  defining the rights of holders of Common Stock.                                                                           |     | —     |                                                 | —     |           | — |
|                |       |            |                                                                                                                                                                                                                    |     |       |                                                 |       |           |   |
| 4.2                 |       |            | Specimen Common Stock  Certificate.                                                                                                                                                                                     |     | S-1/A      |                                                 | 4.1        |           | 2/7/2000 |
|                |       |            |                                                                                                                                                                                                                    |     |       |                                                 |       |           |   |
| 4.3                 |       |            | Third Amended and  Restated Registration Rights Agreement dated December 14, 1999.                                                                                                                                 |     | S-1        |                                                 | 4.2        |           | 12/20/1999 |
|                |       |            |                                                                                                                                                                                                                    |     |       |                                                 |       |           |   |
| 4.4                 |       |            | Stockholder Rights  Agreement, made as of February 1, 2010, by and between  UTStarcom, Inc. and Beijing E-town International Investment and Development  Co., Ltd.                                            |     | 8-K        |                                                 | 4.1        |           | 2/4/2010 |
|                |       |            |                                                                                                                                                                                                                    |     |       |                                                 |       |           |   |
| 4.5                 |       |            | Stockholder Rights  Agreement, made as of February 1, 2010, by and among  UTStarcom, Inc., Elite Noble Limited and Shah Capital Opportunity  Fund LP.                                                    |     | 8-K        |                                                 | 4.2        |           | 2/4/2010 |
|                |       |            |                                                                                                                                                                                                                    |     |       |                                                 |       |           |   |
| 10.1                |       |            | Manufacturing Agreement  signed as of January 23, 2010.                                                                                                                                                            |     | 8-K        |                                                 | 10.1       |           | 1/28/2010 |
|                |       |            |                                                                                                                                                                                                                    |     |       |                                                 |       |           |   |
| 10.2                |       |            | Common Stock Purchase  Agreement, made as of February 1, 2010, by and between  UTStarcom, Inc. and Beijing E-town International Investment and  Development Co., Ltd.                               |     | 8-K        |                                                 | 10.1       |           | 2/4/2010 |
|                |       |            |                                                                                                                                                                                                                    |     |       |                                                 |       |           |   |
| 10.3                |       |            | Common Stock Purchase  Agreement, made as of February 1, 2010, by and among  UTStarcom, Inc., Elite Noble Limited and Shah Capital Opportunity  Fund LP.                                                 |     | 8-K        |                                                 | 10.2       |           | 2/4/2010 |
|                |       |            |                                                                                                                                                                                                                    |     |       |                                                 |       |           |   |
| 10.4                |       |            | Agreement of Entry into  the Zone, made as of February 1, 2010, by and between  UTStarcom, Inc. and the Management Committee of Beijing Economic and  Technology Development Zone (Translation from Chinese). |     | 8-K        |                                                 | 10.3       |           | 2/4/2010 |
|                |       |            |                                                                                                                                                                                                                    |     |       |                                                 |       |           |   |
| 10.5                | *          |            | Employment Offer  Letter, dated February 1, 2010 from UTStarcom, Inc. to  Mr. Jack Lu.                                                                                                                   |     | 8-K        |                                                 | 10.4       |           | 2/4/2010 |
|                |       |            |                                                                                                                                                                                                                    |     |       |                                                 |       |           |   |
| 10.6                | *          |            | Involuntary Termination  Severance Agreement, dated as of February 1, 2010, by and between  UTStarcom, Inc. and Mr. Jack Lu.                                                                             |     | 8-K        |                                                 | 10.5       |           | 2/4/2010 |
|                |       |            |                                                                                                                                                                                                                    |     |       |                                                 |       |           |   |
| 10.7                |       |            | Lease Contract dated as  of February 1, 2010, by and between UTStarcom  Telecom Co., Ltd. and Zhejiang Zhongnan Construction  Group Co., Ltd. (translation from Chinese).                      |     | 8-K/A      |                                                 | 10.1       |           | 2/5/2010 |
|                |       |            |                                                                                                                                                                                                                    |     |       |                                                 |       |           |   |
| 10.8                | *          |            | Amendment to Employment  Offer Letter dated February 22, 2010 from UTStarcom, Inc. to Ying  (Jack) Lu.                                                                                                        |     | 8-K        |                                                 | 10.1       |           | 3/1/2010 |

 

39

----

Table of Contents

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                      | ** ** | **Form**       | ** ** | **Incorporated  by Reference  From Exhibit  Number** | ** ** | **Date Filed** |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|------------------------------------------------------|------------|----------------|
| 10.9*               |       | Letter to Viraj Patel  regarding transition bonus.                                                                                   |       | 10-K           |       | 10.52                                                |       | 3/15/2010      |
|                |       |                                                                                                                                 |       |           |       |                                                 |       |           |
| 10.10*              |       | Letter to Peter  Blackmore dated March 4, 2010 regarding transition bonus.                                                      |       | 10-K           |       | 10.61                                                |       | 3/15/2010      |
|                |       |                                                                                                                                 |       |           |       |                                                 |       |           |
| 10.11               |       | Supplementary Agreement  on Payment (translation from Chinese)                                                                       |       | Filed herewith |       | —                                               |       | —         |
|                |       |                                                                                                                                 |       |           |       |                                                 |       |           |
| 31.1                |       | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                           |       | Filed herewith |       | —                                               |       | —         |
|                |       |                                                                                                                                 |       |           |       |                                                 |       |           |
| 31.2                |       | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                           |       | Filed herewith |       | —                                               |       | —         |
|                |       |                                                                                                                                 |       |           |       |                                                 |       |           |
| 32.1                |       | Certifications Pursuant  to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of  the Sarbanes-Oxley Act of 2002. |       | Filed herewith |       | —                                               |       | —         |

 

----

*              Management contract, plan or arrangement

 

40

----

Table ofContents

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                    |     | UTSTARCOM, INC. |
|-------------------------|----------|----------------------|
|                    |     |                 |   |
| Date: May 10, 2010 |     | By:                  | /s/ KENNETH LUK |
|                    |     |                 | Kenneth Luk |
| * *                | * * | * *             | *Senior  Vice President and Chief Financial Officer* |
| * *                | * * | * *             | *(Principal Financial Officer)* |

 

41

----